Report and Recommendation of the President to the Board of Directors

Project Number: 41926 February 2009

Proposed Loan Zhangbei Wind Power Project (People’s Republic of China)

In accordance with ADB’s public communications policy (PCP, 2005), this abbreviated version of the RRP excludes confidential information and ADB’s assessment of project or transaction risk as well as other information referred to in paragraph 126 of the PCP.

CURRENCY EQUIVALENTS (as of 9 February 2009)

Currency Unit – yuan (CNY) CNY1.00 = $0.1462 $1.00 = CNY6.84

Currency Unit – Hong Kong dollars (HK$) HK$1.00 = $0.129 $1.00 = HK$7.75

The exchange rate of the yuan is determined in relation to a weighted basket of currencies of the trading partners of the People’s Republic of China. In this report, a rate of $1.00 = CNY6.8 is used.

ABBREVIATIONS

ADB – Asian Development Bank CDM – Clean Development Mechanism CECIC – China Energy Conservation Investment Corporation CECIC-WPI – CECIC Wind Power Investment Company CER – certified emission reduction CMI – Carbon Market Initiative CO2 – carbon dioxide DSCR – debt service coverage ratio EIA – environmental impact assessment EIRR – economic internal rate of return GDP – gross domestic product GHG – greenhouse gas HKC – HKC (Holdings) Limited HKE – Hong Kong Energy (Holdings) Limited NCB – national competitive bidding NCGC – North China Grid Company Ltd. NCPG – North China Power Grid NDRC – National Development and Reform Commission O&M – operation and maintenance PRC – People’s Republic of China SEMP – social and environmental management plan SGCC – State Grid Corporation of China SOE – state-owned enterprise VAT – value-added tax WTG – wind turbine generator

WEIGHTS AND MEASURES

dB (decibel) – unit of sound GW (gigawatt) – 1,000 megawatts GWh (gigawatt-hour) – 1,000,000 kilowatt-hour km (kilometer) – 1,000 meters km2 (square kilometer) – 1,000,000 square meters kV (kilovolt) – 1,000 volts kW (kilowatt) – 1,000 watts kWh (kilowatt-hour) – 860.42 kilocalories m (meter) – 100 centimeters Mt (million ton) – 1,000,000 tons MW (megawatt) – 1,000,000 watts s (second) – unit of time t (ton) – 1,000 kilograms TWh (terawatt-hour) – 1,000 GWh W (watt) – unit of active power

NOTE

In this report, "$" refers to US dollars, unless otherwise stated.

Vice-President C. Lawrence Greenwood, Jr., Operations 2 Directors General K. Gerhaeusser, East Asia Department (EARD) P.C. Erquiaga, Private Sector Operations Department (PSOD) Directors A. Terway, Energy Division, EARD J. Yamagata, Infrastructure Finance Division II, PSOD

Team leader K. Zheng, Senior Energy Economist, EARD Team members C. Gin, Counsel, Office of the General Counsel H. Kimura, Investment Specialist (Infrastructure), PSOD X. Liu, Project Officer (Energy), PRC Resident Mission, EARD A. Maxwell, Energy Specialist, PARD T. Oi, Energy Specialist, EARD Y. Qian, Principal Economist (Financial Sector), EARD D. C. Song, Guarantees and Syndications Specialist, Office of Cofinancing Operations S. Suphachalasai, Young Professional (Economics), Economics and Research Department S. F. Wong, Senior Financial Analysis Specialist, EARD X. Zhou, Investment Officer, PRC Resident Mission, EARD

CONTENTS Page LOAN AND PROJECT SUMMARY i MAP I. THE PROPOSAL 1 II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES 1 A. Energy Sector Performance and Challenges in the PRC 1 B. Wind Power Development in the PRC 2 C. Development Challenges in Hebei Province 3 D. ADB Operations 4 III. THE PROPOSED PROJECT 5 A. Project Description 5 B. Project Sponsors 7 C. Project Operational and Financial Performance 9 D. Environmental Aspects and Social Dimensions 10 E. Development Impact 11 IV. THE PROPOSED ASSISTANCE 12 A. The Proposed Loan 12 B. Justification 12 C. Main Risks and Mitigation Measures 13 D. Investment Limitations 13 E. Anticorruption Policy, and Combating Money Laundering and the Financing of Terrorism 13 V. ASSURANCES 14 VI. RECOMMENDATION 14

APPENDIXES 1. Design and Monitoring Framework 15 2. Development Effectiveness Framework 17 3. Wind Power Development in the People’s Republic of China 19 4. The Sponsors of the Zhangbei Wind Power Project 23 5. Brief Introduction to the Power Offtaker 28 6. Financial Evaluation of the Project 30 7. Economic Evaluation of the Project 31 8. Summary Initial Environmental Examination 35 9. Summary Poverty Reduction and Social Strategy 45 10. ADB's Nonsovereign Operations in the People’s Republic of China 47

LOAN AND PROJECT SUMMARY

Borrower CECIC HKE Wind Power Co., Ltd., which is indirectly owned by China Energy Conservation Investment Corporation (CECIC) and by HKC (Holdings) Limited (HKC).

Classification Targeting: General intervention Sector: Energy Subsector: Renewable energy generation

Themes: Environmental sustainability, sustainable economic growth, private sector development Subthemes: Cleaner production, control of industrial pollution; fostering physical infrastructure development; public–private partnerships

Environment and Category B under the Environment Policy (2002) of the Asian Social Assessment Development Bank (ADB), category C under ADB’s Involuntary Resettlement Policy (1995), and category C under ADB’s Policy on Indigenous Peoples (1998).

Project Description The Zhangbei Wind Power Project (the Project) is a 100.5 megawatt wind power facility to be constructed on a build-operate- own basis in Zhangbei County, Hebei Province, the People’s Republic of China (PRC). Annually, the Project will generate 250.9 gigawatt-hours of electricity from wind resources, replace the usage of 86,118 tons (t) of standard coal for power generation, reduce carbon dioxide emissions by 242,127 t, and conserve 5,900 t of freshwater.

Development Impact The Project supports the strategy of the Government of the PRC (the Government) to promote renewable energy development, aiming to increase the total installed capacity of wind power by about five times, from 6.1 gigawatts in 2007 to 30.0 gigawatts by 2020, and to enlarge the share of renewable energy in the country’s power generation portfolio from 8% in 2007 to 20% in 2020. The Project will lessen reliance on coal burning for power generation and abate greenhouse gas emissions, thereby contributing to the mitigation of global warming and climate change. The Project will enhance the utilization of indigenous renewable energy resources, improve wind farm management practices, provide opportunities for job creation and income growth, raise fiscal revenues, upgrade local infrastructure, and protect the regional ecological environment, thereby contributing to poverty alleviation and sustainable development in the region. ii

Project Sponsors and CECIC is the only national-level enterprise owned by the Guarantors Government that is specifically tasked with improving energy efficiency, developing renewable energy, and protecting the environment in the PRC. CECIC started as a government agency in the former State Planning Commission and was registered in 1988 as a company under the PRC Company Law. Since 2003, it has consolidated its operations in (i) wind power development; (ii) waste management, including biomass power generation; (iii) water supply and sanitation; and (iv) energy efficiency projects. CECIC attaches high priority to wind power development in its long-term corporate development strategy. With a total of 996.5 megawatt wind power facilities under operation, construction and preparation, CECIC has accumulated the capacity and experience to become an industry leader in designing, building, and operating large wind farms in the PRC.

Established in 1973 as Kumagai Gumi (Hong Kong) Limited, HKC has grown over the last 35 years into one of Asia’s most specialized investors and contractors for civil engineering, infrastructure construction, and energy development. Listed on the Hong Kong Stock Exchange, HKC has focused its developmental strategy on commercial properties, infrastructure extension, and alternative energy.

Financial and Economic Without taking into consideration revenues from the sale of Performance of the certified emission reductions, the Project is expected to yield a Project financial internal rate of return of 7.49%, which is above the weighted average cost of capital. The Project’s economic internal rate of return is 17.4%, which indicates strong positive economic externalities and is higher than the social discount rate of 12.0%.

Environmental and The Project harnesses wind resources on undeveloped land and Social Issues affects no indigenous peoples. As the site is vacant, resettlement is not needed. Disturbances during construction will be small, transient, and properly managed. Perceptible environmental impacts during operation will be mostly noise and visual intrusion, but both are minimal because of the distance between the wind turbines and the nearest settlements and the relatively low scenic value of the project site. The Borrower has formulated a social and environmental management plan and allocated sufficient funds to implement it to further minimize negative environmental and social impacts and to restore and protect the ecology of the project site.

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Justifications The Project merits ADB support because it helps promote sustainable development in Hebei Province and diversifies electricity production toward renewable resources in an environmentally friendly way. The Project enhances public–private partnerships and encourages foreign participation in wind power generation, which is crucial for the further development of the nascent sector. The Project is consistent with ADB’s strategies for the country and the energy sector. Meanwhile, the Project will support the efforts of leading clean energy developers to adopt and deploy advanced low-carbon technologies and generate significant demonstration effects to encourage other renewable energy projects in the country.

115 o 00'E 118 o 00'E

ZHANGBEI WIND POWER PROJECT Project County Hebei Province IN THE National Capital PEOPLE'S REPUBLIC OF CHINA Provincial Capital City/Town Project Site National Road Railway I N N E R M O N G O L I A River Weichang County Boundary o o 42 00'N Provincial Boundary 42 00'N Kangbao Boundaries are not necessarily authoritative.

Guyuan

Longhua

N Zhangbei Fengning

Shangyi Pingguan Chongli Chengde 0 40 60 80 100 Wangquan Chicheng L I A O N I N G Kilometers Zhangjiakou , Huai an Xuanhua Kuancheng Huailai

Xinglong Qinglong Zhuolu

Yangyuan Zunhua Qianxi

Sanhe Qinhuangdao Yu Xian BEIJING Yutian Lulong

Changli Tangshan o S H A N X I o 40 00'N Laishui Zhuozhou 40 00'N Fengnan Yixian Laiyuan Gaobeidian Leting Dingxing Yongqing Tianjin Tanghai Rongcheng Xushui Bazhou Mancheng Xongxian B o h a i S e a Shunping Anxin , Fuping Wen an Baoding Tang Xian

0 Renqiu 8 -

4 Quyang

2 Qingyuan Gaoyang 5 Daicheng 5 a

Dingzhou Lixian Qing Xian

E Xingtang o 118 o 00'E G 115 00'E Hejian

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on a proposed loan to the CECIC HKE Wind Power Co., Ltd., for the Zhangbei Wind Power Project (the Project) in the People’s Republic of China (PRC). The design and monitoring framework and the development effectiveness framework are in Appendixes 1 and 2.

II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES

A. Energy Sector Performance and Challenges in the PRC

2. The PRC has Asia’s largest and fastest-growing energy sector, which has expanded at an average annual rate of 5.5% since 1988 to support rapid economic growth and massive urbanization. The PRC’s developmental goal of quadrupling its per capita gross domestic product (GDP) by 2020 from its 2000 level and its currently low energy consumption per capita indicate potential for strong growth in demand for energy for many years to come.1 The PRC attained a low average energy–GDP elasticity of 0.47 between 1980 and 2000. However, this elasticity increased sharply to 1.4 during the period between 2001 and 2005, due mainly to swift industrialization, infrastructure development, and expanded household and commercial consumption. To alleviate chronic electricity shortages that had constrained economic development in many provinces, the PRC installed over 205 gigawatts (GW) of power generation capacity in 2006 and 2007. 2 Excessive reliance on coal (accounting for 69% of the total primary energy supply) and increasing dependence on imported oil (accounting for more than 40% of the total oil consumption) have caused serious concerns about environmental degradation and energy insecurity and could significantly affect global climate change and world energy markets.

3. Coal, the most carbon dioxide (CO2)-intensive fossil fuel, has been dominating energy production and power generation in the PRC.3 About 82% of electricity was produced by burning coal in 2007. The costs in terms of resource depletion, environmental deterioration, mining safety, and public health associated with producing, transporting, and consuming coal are not fully reflected in coal prices. Cleaner and renewable energy has been put at a disadvantage vis-à-vis coal, which has been implicitly subsidized for decades. Pollution caused by high coal usage is aggravated by the economy’s relatively low energy efficiency, which requires about 3.5 times more energy per unit of economic output than the world average. Acid rain falls on one third of the country’s territory and nearly half of its farmland. If current trends are not effectively curtailed, greenhouse gas (GHG) emissions will increase rapidly, which will exacerbate global warming and inflict heavy social, economic, and environmental damage. The poor would suffer first and foremost, and remain the most vulnerable.

4. Recognizing that the current energy growth trajectory dominated by fossil fuels is neither environmentally sustainable nor economically desirable, the Government of the PRC (the Government) has made strong commitments, established a series of mandatory targets, and adopted incentive-based policies to improve energy efficiency, diversify the energy supply mix into renewable sources, reduce emissions, and abate global warming and climate change. In its medium- and long-term renewable energy development program promulgated in August 2007, the Government set the goal of producing 15% of its primary energy from renewable sources by 2020,

1 Annual per capita electricity consumption in the PRC was relatively low at 2,500 kWh in 2007, which is about a quarter of the 9,786 kWh in Organisation for Economic Co-operation and Development countries in 2005. 2 The incremental capacity of 205 GW is larger than the combined generation capacity of Germany and the United Kingdom in 2005 (198 GW) and is equivalent to building two 1.0 GW power plants every week. 3 As the world’s largest coal-producing and -consuming country, the PRC doubled its coal use within 5 years between 2002 and 2007, when the total coal production reached 2.6 billion tons. More than 55% of coal is used to generate electricity, with the rest used for industrial processes, space heating, and household consumption. 2 up from 7.5% in 2005. Development plans have been formulated to raise the share of electricity production from renewable sources from 8% in 2007 to 20% by 2020, mainly by constructing 30 GW of wind power (an increase of nearly 5 times from 6.1 GW in 2007), 20 GW of biomass and biogas power, and 300 GW of hydropower.

B. Wind Power Development in the PRC

5. The PRC’s vast land area and long coastline are endowed with abundant wind resources. The China Meteorology Bureau concluded that,4 without taking into account the Qinghai-Tibetan Plateau, technically exploitable wind energy resources at a height of 10 meters (m) above the ground could reach 2,548 GW. About 75% of the PRC’s rich onshore wind resources are concentrated in the northwestern grasslands and the Gobi Desert, stretching from Inner Mongolia through Hebei, Ningxia, and Gansu to Xinjiang.5 A summary on wind power development in the PRC is presented in Appendix 3.

6. The legal and regulatory environment for renewable energy development has steadily improved in recent years. The Renewable Energy Law, which became effective in January 2006, and its implementing policies provide financial stimulation for renewable energy, including the establishment of national and regional renewable energy funds, the improvement of access to project financing, and specific tax preferences. It has reduced risks for project developers by mandating power grid interconnection and full power offtake, as well as by providing guaranteed minimum prices or subsidies for certain types of renewable energy. For wind power projects approved by the National Development and Reform Commission (NDRC), the Renewable Energy Law and its implementing policies require that (i) the grid utility be responsible for the construction of interconnecting transmission lines; (ii) the grid utility purchase all electricity generated; (iii) the tariff for uploading electricity to the power grid be determined through a nationwide concession bidding process; and (iv) the gap between the wind electricity tariff and the average electricity tariff be shared across the whole power grid through a levy on each kilowatt-hour (kWh) of electricity purchased by end users.

7. Fiscal incentives are provided to accelerate wind power development. The value-added tax (VAT) for wind power projects was reduced from 17% to 8.5%, since no fuel costs can be deducted for wind power generation. The corporate income tax (at 25% of the gross profit) is waived for the first 3 years for wind farms constructed in the underdeveloped western region, which includes Hebei and Inner Mongolia. Interest during construction is partly subsidized. Further, the Government is considering adopting a mandatory quota system on renewable energy generation for independent power producers. Meanwhile, wind power development is a high-priority of the national Clean Development Mechanism (CDM), enabling wind farms with more than 50% domestic ownership to sell certified emission reduction (CER) certificates under the terms of the United Nations’ Kyoto Protocol on Climate Change. By September 2008, 39 wind power projects were successfully registered with the United Nations’ CDM executive board.

8. The PRC has strived to develop its wind resources over the last 2 decades but had accumulated only 345 megawatt (MW) of installed capacity by 2000, equivalent to a small coal- fired power plant. However, since the enactment of the Renewable Energy Law, the PRC has made rapid strides in harnessing wind resources, doubling its wind power generation capacity each

4 The PRC National Climate Center. 2006. The China Wind Resource Assessment Report. Beijing. 5 Within this narrow strip of about 200 km, the wind power density normally ranges from 200 watts per square meter (W/m2) to 300 W/m2 and can reach above 500 W/m2 in some regions with more favorable conditions.

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year.6 According to the Global Wind Energy Council, 3,155 wind turbines with a total capacity of 3.45 GW were installed in the PRC in 2007. This addition raised the PRC’s cumulative wind power capacity to 6.1 GW,7 which consists of 158 wind farms across 21 provinces. Another 4.2 GW of wind power projects had been approved by the Government and were under construction in 2007.8

9. Despite its rapid development in recent years, wind power remains insignificant in the nation’s overall power mix, accounting for only 0.9% in its overall power generation capacity of 713.6 GW and a meager 0.4% in its total electricity output of 3,263.2 terawatt-hours (TWh) in 2007.9 Even doubling the current national target for wind power development by 2020 to 60.0 GW will leave the wind power share below 5.0% of the estimated total power generation capacity in the country, which could grow to 1,200.0 GW at a moderate average annual growth rate of 4.1% during the 13-year period between 2007 and 2020.

10. Currently, more than 90% of wind farms are developed by large state-owned enterprises (SOEs), especially large power companies. Many private sector companies have demonstrated interest in developing wind farms but have found that the financial returns on wind power investment are low, up-front costs for conducting wind resource assessment and obtaining all necessary permits and authorizations are high, and technological uncertainties are difficult to handle. Large SOEs have clear mandates from the Government to implement the medium- and long-term renewable energy development program. They also have relatively stronger technical capacity to undertake big wind power projects and larger asset portfolios to achieve economies of scale and absorb the risks of deploying new and advanced technologies.

C. Development Challenges in Hebei Province

11. Hebei has a fast-growing but energy-intensive economy. With a population of 67.4 million on a land area of 188,000 square kilometers (km2), Hebei had a GDP of CNY1,386.4 billion in 2007, having achieved an average annual growth rate of 12.8% during the previous 5 years. More than 80% of the province’s total industrial outputs are produced by seven leading industries.10 Energy consumption per CNY10,000 of GDP in Hebei was 1.84 tons (t) of standard coal equivalent in 2007, which is 59% higher than the national average of 1.16 t.

12. Hebei faces substantial challenges for poverty alleviation and sustainable development. In spite of its fast growth, Hebei’s per capita consumption in 2006 of CNY4,945 was 19% below the national average of CNY6,111. Still, 39 of 592 nationally recognized impoverished counties are in Hebei, including Zhangbei County, where the Project is located. About 83% of Zhangbei’s population of 370,800 in 2007 lived in rural areas, earning subsistence income from poor soils and remaining vulnerable to inclement climate. In 2006, the county’s GDP was CNY2.5 billion, and the net income per farmer was merely CNY2,773, which is less than $1 per day and among the lowest levels in the PRC. To ensure the sustainability of its economic growth, Hebei needs to carefully

6 In the medium- and long-term renewable energy development program, the national target for cumulative wind power capacity was set at 5 GW by 2010 and 30 GW by 2020. The original goal for 2010 was achieved 3 years early, in 2007, and was therefore raised to 10 GW. The reality is evolving so fast that this revised goal of 10 GW is likely to be exceeded in 2008 and could be raised again to a level surpassing 20 GW. 7 The PRC’s total wind power capacity ranked fifth in the world in 2007, after Germany (22.3 GW), United States (16.8 GW), Spain (15.1 GW), and India (8.0 GW). 8 While the wind power capacity addition accounted for about 30% of the total incremental power generation capacity in the United States and 40% in Europe in 2007, wind power accounted for less than 3% of newly commissioned capacity in the PRC in 2006 and 2007. Most new power generation facilities are going to burn coal and emit CO2 for many decades to come. 9 The current ratio between the electricity output and the generation capacity of wind power in the PRC reflects serious wind resource underutilization in existing wind farms, mainly caused by inadequate wind farm management, obsolete technologies, and poor equipment reliability. 10 These industries are (i) iron and steel, accounting for more than 20% of the national total; (ii) machinery; (iii) petrochemicals; (iv) chemicals and pharmaceuticals; (v) food processing; (vi) construction materials; and (vii) textiles.

4 address such constraining issues as limited water resources, sharp increases in energy demand, and rising pressures for environmental protection.

13. Energy consumption has severely outpaced energy production in Hebei in recent years, causing frequent brownouts. Electricity production in Hebei grew by 12.7% in 2007, amounting to 164.6 TWh generated from a total installed capacity of 30.2 GW. However, this expansion could satisfy only 80% of electricity consumption in the province, which grew by 16.1% in 2007 to 204.1 TWh, leading to a high electricity–GDP growth ratio of 1.26.11 This boom in demand for electricity pushed up prices on coal for power generation in Hebei by 18.4%, from CNY380/t in 2006 to CNY450/t in 2007.

14. Rapid growth in electricity demand in the northern PRC will continue. According to the 11th Five-Year Development Plan for the North China Power Grid (NCPG), both the load volume and electricity usage in the Beijing-Tianjin-Tangshan area are estimated to double between 2006 and 2020.

Electricity Demand Forecast, Beijing–Tianjin–Tangshan Power Grid

Item 2005 2010 2015 2020 Electricity Usage (GWh) 1,305 1,740 2,194 2,663 Growth Index (2005=100) 100 133 168 204

Maximum Load (GW) 23 32 42 52 Growth Index (2005=100) 100 139 183 226 GW = gigawatt, GWh = gigawatt-hour. Source: The North China Grid Company Limited.

15. About 97% of power distributed by the NCPG is generated from coal-burning. Hydropower options are scant in the region. Significant capacity expansion in thermal power generation substantially increased demand for coal and GHG emissions. To diversify electricity supply into renewable sources, abundant wind resources in Hebei and Inner Mongolia must be effectively utilized, as pioneered by wind power development in Zhangbei. Because of its rich wind resources, proximity to Beijing, excellent transportation network, and convenience for power grid integration, Zhangbei was selected by NDRC as the PRC’s first 1.0 GW wind power development district.

D. ADB Operations

16. The Asian Development Bank (ADB) promotes inclusive, efficient, equitable, and sustainable economic growth to eliminate poverty across the Asia and Pacific region. In its long- term strategic framework 2008–2020 (Strategy 2020), ADB identified energy as one of five core operational areas and achieving environmental sustainability as one of three strategic development priorities.12 ADB’s operational focus for the energy sector hinges on addressing energy security and climate change by improving energy efficiency and enlarging the use of indigenous clean and renewable energy. ADB’s country partnership strategy for the PRC (2008–2010) concentrates on achieving balanced and sustainable growth with more efficient uses of resources and more stringent protection of the environment.13 In recent years, ADB has introduced new initiatives (e.g., the Energy Efficiency Initiative and the Carbon Market Initiative [CMI]) and adopted more client- oriented operational modalities (e.g., multitranche financing facilities) to reinforce its assistance to developing member countries’ acquisition of low-carbon technologies and implementation of energy efficiency and renewable energy projects.

11 Electricity consumption per CNY10,000 of GDP in Hebei actually increased from 1,487.6 kWh in 2005 to 1,515.9 kWh in 2006 and then to 1,579.8 kWh in 2007, for an increase of 6.2% in 2 years. 12 ADB. 2008. Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank 2008–2020. Manila. 13 ADB. 2008. Country Partnership Strategy (2008–2010): People’s Republic of China. Manila.

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17. ADB started to support wind power development in the PRC in 1998 with project preparatory technical assistance.14 At that time, the total installed wind power capacity in the country was merely 167 MW, and there were significant barriers, including the absence of a conducive legal and regulatory framework, the lack of appropriate target for renewable energy development, the poor availability and reliability of wind data, the limited domestic manufacturing capacity, and the scarcity of accessible funds to implement clean technology projects. The ensuing project loan, approved in 2000, included three wind power projects with a total capacity of 78 MW in Xinjiang Uygur Autonomous Region and the provinces of Heilongjiang and Liaoning.15 However, in 2004, the Government withdrew the request and sought termination of the loan, mainly for lack of agreement with the provincial governments regarding appropriate tariffs. ADB continued its policy dialogue with the Government on the need for a better regime to select wind power project developers competitively and to establish the wind power tariff transparently, with greater participation by the private sector and improved capacity in the domestic manufacturing industry. These issues have been largely addressed following the enactment of the Renewable Energy Law.

18. The Project will extend ADB’s continued support for the implementation of the PRC’s 11th Five-Year Development Plan (2006–2010), which attaches high priority to energy efficiency, renewable energy, and pollution reduction, as well as specifically requiring that financial assistance from international financial institutions be used for resource conservation, environmental improvement, and infrastructure development. The Project will learn and incorporate lessons from ADB’s earlier renewable energy projects, with the emphasis on improving project design, financing structure, risk mitigation, implementation arrangements, and demonstration effects.

19. ADB’s nonsovereign operations have traditionally focused on assisting private sector enterprises. The proposed Project explores an innovative approach to support renewable energy development led by a large SOE and implemented by a Sino-foreign joint venture.

III. THE PROPOSED PROJECT

A. Project Description

20. Through national competitive bidding (NCB) organized by NDRC, China Energy Conservation Investment Corporation (CECIC) won concession rights for 25 years to develop a wind power project of 100.5 MW on a build-operate-own basis at Lünaobao in Zhangbei. The Project is the sixth wind power farm developed by CECIC in Zhangbei and is strategically situated between the load centers of Beijing, Tianjin, and Tangshan and the southeastern rim of the Inner Mongolia Plateau, where wind energy resources are exceptionally abundant. 16 More than 10 companies are currently developing or operating wind farms in or near Zhangbei. The project site is well connected by road and close to the main power transmission network.

21. Within a land area of 4,182 km2, Zhangbei experiences frequent and strong southbound winds, which rapidly sweep from Siberia toward the North China Plain. The commercially exploitable wind resources in Zhangbei are estimated to be 5.0 GW. The average annual wind velocity is 8.4 meters per second (m/s), and the average annual wind energy density is 492.3 watts per square meter (w/m2) at a height of 70 m. The frequencies for five wind directions sum up to 71.5%. The probability for the wind velocity ranging between 3 m/s and 25 m/s stands at 99.96%.

14 ADB. 1998. Technical Assistance to the People’s Republic of China for the Wind Power Development Project. Manila (TA 3071-PRC for $600,000). 15 ADB. 2000. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the People’s Republic of China for the Wind Power Development Project. Manila (Loan 1818-PRC for $58 million). 16 The project site is centered at 114o32’30” east longitude and 41o03’50” north latitude, about 242 km northwest of Beijing. The altitude of the project site ranges from 1,500 m to 1,600 m above the mean sea level.

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The once-every-50-years maximum wind velocity averaged over a 10-minute interval is estimated to be 41.1 m/s.

22. The Project will install 67 wind turbine generators (WTGs) on ridges ascending from northwest to southeast, perpendicular to the prevailing wind direction. Each WTG will have a rotor diameter of 77.0 m, a hub height of 61.5 m, and a rated output of 1.5 MW. Under the equipment supply contract, the manufacturer provides a 24 month warranty, which guarantees a per unit WTG yield curve of no less than 95% of the guaranteed value and an average WTG availability of no less than 95% of the applicable availability percentage for all units of the wind farm collectively.

23. The power generated by WTGs will be stepped up from 0.69 kilovolts (kV) to 35 kV and then pooled through a power collection system to a substation located inside the wind farm. The pooled power will be further stepped up to 220 kV and metered at the substation. Finally, the power will be fed from the substation into NCPG through 220 kV lines.

24. The main activities for the Project consist of the following: (i) constructing a paved access road of 1.8 kilometers (km) from the main road to the wind farm and internal service roads branching to individual WTGs; (ii) laying foundations for 67 towers, 67 transformers, and 1 substation, including excavation, backfilling thick slabs of reinforced concrete, and restoring the surrounding ground; (iii) erecting 67 towers and installing and testing 67 WTGs; (iv) installing and testing 67 box-type 35 kV transformers of 1.6 megavolt amperes and a 220 kV voltage-upstaging substation of 120 megavolt amperes; (v) installing power collection cables and lightning protection devices; (vi) installing a monitoring, control, and data-collection system to serve all WTGs; (vii) constructing offices, warehouses for spare parts, and a dormitory for 30 workers and technicians who will carry out daily operation and maintenance (O&M) works; and (viii) conducting site vegetation recovery and maintenance.

25. In addition to adopting advanced WTGs that can extract more energy from the same swept area than most conventional designs, the Project will introduce two new features: (i) weather pattern analysis that will improve predictability and thus dispatch scheduling of wind power generation, which is a key concern regarding most forms of renewable energy, and (ii) an improved O&M regime that strengthens reliability, reduces WTG downtime, and enhances overall cost- effectiveness during the whole operation period of the wind farm.

26. The Project has obtained certain regulatory and statutory approvals and permits, including the formal project approval from NDRC, power grid integration agreement from the State Power Grid Company and approval on the environmental impact assessment from the Hebei Environmental Protection Bureau.

27. Site preparation for the Project started in early 2008. The contracts for procuring WTGs and towers were concluded in mid-2008 through NCB. Civil and electric works will be completed by qualified contractors selected on a quality and cost basis through NCB. An experienced independent project-supervision team is engaged to ensure implementation on time, within budget, and of high quality. Project completion is planned for the end of 2009. Procurement processes so far meet all governmental requirements. The main goods and services are procured competitively from the market, and all are from ADB member countries.

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B. Project Sponsors

28. The project sponsors are CECIC and HKC (Holdings) Limited (HKC). Both have vast industry experience and strong financial capability for developing renewable energy projects in the PRC. They are now jointly developing three wind power projects with a combined capacity of 500 MW.17 CECIC and HKC have also collaborated in implementing and operating a waste-to-energy cogeneration project in Linyi, Shandong Province.18

29. A Sino–foreign joint venture indirectly owned by CECIC and HKC will be established under the name of the CECIC HKE Wind Power Co., Ltd., and registered with the Ministry of Commerce of the PRC as a special purpose vehicle to implement the Project. Such a joint-venture structure lays down a solid foundation for enhancing corporate governance, ensuring financial transparency, and channeling foreign borrowings.19 The joint venture will derive strong management, technical, and financial support from its parent companies. A description of the joint-venture partners is presented in the following sections and Appendix 4.

1. The China Energy Conservation Investment Corporation

30. With headquarters in Beijing, CECIC is a Government-owned corporation administered directly by the State-Owned Assets Supervision and Administration Commission of the State Council. CECIC is the sole national SOE in the PRC specifically tasked with designing, financing, and operating projects to improve energy efficiency, develop renewable energy, and protect the environment. CECIC started in the early 1980s in response to the second international oil crisis as the Energy Conservation Planning Bureau in the former State Planning Commission, the forerunner of NDRC. It was empowered with the responsibility to allocate and manage state energy conservation investment funds. In 1988, the State Council commercialized these functions and registered CECIC as a corporation with its own legal identity under the PRC Company Law.

31. To support the Government’s commitments toward comprehensively utilizing and conserving resources, including energy and water, and building an environmentally friendly society, CECIC has pioneered new technologies and developed demonstration projects for energy efficiency and pollution control. In the past 20 years, CECIC has completed more than 3,000 large and important energy conservation and renewable energy development projects in 13 subsectors in more than 300 municipalities. 20 Total accumulated investment exceeded CNY55.0 billion, serving both fast-growing coastal provinces and resource-abundant inland regions. Currently, CECIC treats and recycles more than 2.0 million ton (Mt) of industrial wastes and 260 Mt of wastewater per year. These projects have delivered significant environmental benefits, including (i) annual energy savings equal to 45.8 Mt of standard coal, (ii) annual chemical oxygen demand reductions amounting to 75,000 t, and (iii) annual CO2 emission reductions of 105.0 Mt. Looking ahead, CECIC has set new investment targets that can additionally save 4.3 Mt of coal, reduce

17 The other two wind power projects are (i) the 2006 national concession project of 200 MW at Danjinghe, Zhangbei, Hebei, with a total investment of CNY1.6 billion by CECIC (60%) and HKC (40%), which is less than 20 km away from the proposed project site, and (ii) the 2007 national concession project of 200 MW at Changma, Gansu. 18 This waste-to-energy plant, operational from 2007, is jointly owned and operated by CECIC (60%) and HKC (40%). The total investment was CNY260 million. Using circulating fluidized bed technology, the plant processes 300,000 t of waste, generates 200 GWh of electricity, and supplies 1.8 million gigajoules of heat annually. It derives revenues from the garbage processing fee and sales of electricity, steam, and ash, as well as from CDM credits. 19 According to existing investment guidelines, a joint venture with more than 25% foreign equity is authorized to borrow long-term from foreign sources up to the gap between the total project cost and the sponsors’ equity contributions. 20 These include 450 cogeneration projects with a combined capacity of 10,000 MW, more than 100 urban natural gas supply and distribution projects with a combined capacity of 13.93 million cubic meters per day, district heating projects servicing more than 200 million square meters, coal washing and treatment with the capacity of 59.7 Mt per year, and wastewater treatment with the capacity of 110 million cubic meter per year for paper making and food processing industries.

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CO2 emissions by 11.1 Mt, cut chemical oxygen demand by 0.4 Mt, and process 5.0 Mt of industrial wastes per year by 2012.

32. CECIC currently owns or holds majority shares of 15 second-level subsidiary companies and more than 60 third-level subsidiary companies. To grow further, CECIC intends to raise more equity capital through an initial public offering in a domestic or international stock exchange in about 3 years. In its long-term corporate development strategy, CECIC concentrates 80% of its total assets in the following four areas: (i) wind power development; (ii) waste management, including biomass power generation; (iii) water supply, wastewater treatment, and sanitation; and (iv) energy efficiency improvement and resource conservation. In recent years, CECIC has improved its corporate governance structure and formulated an action plan to fulfill its corporate social responsibilities.

33. To break bottlenecks in WTG supplies and to absorb advanced wind power technologies, CECIC acquired 50% of the second-largest domestic WTG manufacturer, the Zhejiang Windey Wind Generating Engineering Co., Ltd., (Zhejiang Windey) in June 2006. Zhejiang Windey has mature technologies for 800 kilowatt (kW) WTGs and is now designing and manufacturing 1.5 MW WTGs in cooperation with a leading European wind turbine design company.

34. CECIC’s investment in wind power development is channeled through its wholly owned subsidiary specialized in wind energy investment, the CECIC Wind Power Investment Co. (CECIC- WPI), which was established in January 2006. For specific projects in different locations, project companies are set up to work with different equity partners and long-term debt providers.

35. CECIC-WPI has accumulated sufficient capacity and experience to become an industry leader in implementing and operating large wind farms. CECIC-WPI now takes the lead in (i) operating four wind farms with a combined capacity of 244.5 MW in Hebei and Xinjiang; (ii) constructing two new wind farms with a combined capacity of 249.5 MW in Zhangbei, Hebei; and (iii) developing three wind farms with a combined capacity of 502.5 MW in Hebei and Gansu. Aiming to occupy 10% of the PRC’s wind power market, CECIC-WPI has conducted wind resource measurement and reserved developmental rights in Inner Mongolia, Hainan, and Fujian for about 2,000 MW and has plans to harness 1,500 MW of wind power by 2012. CERs from five CECIC wind farms have been successfully registered with the CDM executive board.

36. Cooperation between CECIC and ADB started in 1998 when ADB funded a small-scale technical assistance project to assess and enhance CECIC’s capacity. 21 While CECIC was generally considered to be a strong SOE, certain internal requirements of the PRC prevented ADB’s sovereign assistance.

2. HKC (Holdings) Limited

37. Established in 1973 as Kumagai Gumi (Hong Kong) Limited, HKC has grown over the past 35 years to become one of Asia’s specialized investors, developers, and contractors in civil engineering, infrastructure, energy, and building development. HKC has gained reputation and experience in designing and implementing large infrastructure projects, most notably in Hong Kong, China, and the PRC. It has built or engineered some of the world’s most impressive construction projects, including the world’s 7th, 8th, and 11th tallest buildings.

21 ADB. 1997. Technical Assistance to the People’s Republic of China for Capacity Building for Energy Conservation. Manila (TA 2870-PRC, approved on 18 September, for $78,000). The technical assistance assessed CECIC’s capacity to serve as an intermediary utilizing ADB financing.

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38. HKC’s long-term development strategy focuses on property, infrastructure, and alternative energy in the PRC and other regions in Asia. Its investments in the PRC have focused mainly in the following areas: (i) Property investment. Capitalizing on its extensive PRC relationships and construction expertise, HKC has made large investments in real estate markets in Beijing, Shanghai, Guangzhou, Shenyang, Tianjin, and Nanxun. (ii) Infrastructure development. HKC has invested in several infrastructure projects in the PRC, including a toll road in Guilin and a water treatment facility in Hainan. (iii) Alternative energy. HKC has made sizeable investments in clean and renewable energy in the PRC, expanding its involvement in the wind power, biofuel, and waste- to-energy businesses, and planning to develop more wind farms in Heilongjiang, Hebei, Gansu, and Inner Mongolia.

39. HKC conducted its initial public offering in 1987 on the Stock Exchange of Hong Kong (Stock No. 0190). In April 2004, Creator Holdings Limited became HKC’s majority shareholder. As part of HKC’s restructuring, Cerberus Asia Capital Management, LLC, and Penta Investment Advisers, Ltd., took major equity stakes in October 2007, and are now the second and third largest stakeholders in HKC, respectively. In recognition of its rapid growth and increasing business influence, HKC was selected as a constituent stock in the Hang Seng composite indexes, effective from 15 October 2008.

40. In March 2008, HKC acquired a 74.99% interest in JIC Technology Company, Ltd, which was also listed on the Stock Exchange of Hong Kong (Stock No. 987). The latter's name was then changed to Hong Kong Energy (Holdings), Ltd. (HKE). All of HKC’s new investment in the alternative energy business, including its equity contribution to the proposed Project, will be channeled through HKE, which is now a majority-owned specialized subsidiary of HKC.

41. HKC’s financial practices and information disclosure are regulated by the Stock Exchange of Hong Kong.

C. Project Operational and Financial Performance

42. The capacity factor of the Project is projected to be 28.5%, yielding 2,497 hours (h) of operation at full-capacity equivalent to supply 250.9 gigawatt-hours (GWh) of clean electricity per year. In accordance with the Renewable Energy Law, NCPG will construct transmission lines and purchase all the electricity generated by the Project. Recently, NDRC decided to implement a new scheduling and dispatch system to encourage energy-efficient and environmentally friendly power generation. This new system gives first priority to, and maximizes the use of, renewable energy that cannot be stored, such as wind, solar, and marine energy, as well as run-of-the-river hydropower.

43. As one of five regional grids under the State Power Grid, NCPG bears responsibility for safeguarding power supply to the PRC capital, Beijing, and providing reliable power services to support economic and social development in the northern PRC. Its grid covers a land area of 1.63 million km2 and serves a population of 230 million. By 2007, the total installed power generation capacity on NCPG was 145 GW, of which about 30% was in the Beijing-Tianjin-Tangshan area. A brief introduction to the power offtaker is provided in Appendix 5.

44. A tariff of CNY0.5006/kWh for the first 30,000 h of full-capacity operation, including the VAT, has been determined through the concession bidding process and approved by the Government. At this tariff, the Project's annual electricity sales revenue will be CNY125.6 million. After the first 30,000 h of full-capacity operation, which lasts for about 12 calendar years, the tariff will be adjusted to the average for electricity uploaded to the power grid.

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45. On 29 June 2008, NDRC raised the tariff for thermal power plants in northern Hebei by CNY0.016/kWh to reflect the increased coal price. For new thermal power plants with desulphurization facilities in northern Hebei, the upload tariff was raised to CNY0.3664/kWh, an increase of 4.57%. A review of historic tariff adjustments yields a conservative assumption that the upload tariff will continue to be gradually adjusted by an average annual rate of 2.5%. This indicates that the average upload tariff for NCPG will be around CNY0.5177/kWh when the Project has completed its first 30,000 h of full capacity equivalent operation.

46. With normal wind conditions, the Project will start to generate financial profits in the first year of its full operation, since it has stable sales revenues with a predetermined tariff and zero fuel costs. Its direct operational costs are mainly for maintenance and repairs, and thus relatively small. Due to the large up-front capital investment for the Project, depreciation and interest payments will account for a big portion of the operational costs, especially in the early years during the Project's operational period. The Project's financial asset structure will improve gradually with a declining debt–equity ratio, since the long-term debts will be amortized over time.

47. Without considering the revenues from the sale of CERs, the Project is expected to yield a financial internal rate of return (FIRR) of 7.49%, which is above the weighted average cost of capital at 2.75%. With revenues from CERs, the FIRR will be enhanced to 9.24%. The risk tolerance levels of the Project have been stress-tested with breakeven analysis, sensitivity analysis, and scenario comparison. The financial evaluation of the Project is presented in Appendix 6.

48. Strong growth in electricity consumption in the northern PRC means that all power generated by the Project will be used to meet incremental demand. Value-added and corporate income taxes from the Project amount to CNY554.6 million over the project life, contributing substantial fiscal revenues to support local development,22 which helps solidify government support for the Project. The economic internal rate of return stands at 17.4%, which indicates strong positive economic externalities and is higher than the social discount rate of 12.0%. Sensitivity analyses and scenario simulations demonstrate that the Project is economically justifiable and robust under all foreseeable circumstances. The economic evaluation of the Project is presented in Appendix 7.

D. Environmental Aspects and Social Dimensions

49. The Project has been classified as category B under ADB’s Environment Policy (2002) because it is unlikely to create any significant adverse environmental impact during construction or operation. A comprehensive environmental impact assessment for the Project, including environmental and social site visits and community consultations, was completed in November 2008 in line with ADB’s environmental safeguard policies for environmental category B projects. The summary initial environmental examination for the Project is presented in Appendix 8.

50. The perceptible negative environmental impacts such as noise and visual intrusion are negligible, mainly because of the considerable distance between the turbines and the nearest settlements. WTGs will not endanger migratory birds or bats, as there are few in the wind farm area, which is not located in the main habitat or along the main migration routes of migratory birds. In fact, extensive wind power development will help reduce wind speeds by extracting energy from air flows, and thus help mitigate the sandstorms that frequently affect the northern PRC and thereby reverse desertification. Disturbances associated with construction such as land disturbance, vegetation clearance, construction noise, traffic congestion, and waste generation are

22 Tax contributions from businesses related to wind power are estimated to account for up to 60% of the total fiscal revenues of Zhangbei County.

11 normally temporary and limited in scope. Implementing a carefully designed social and environmental management plan, which includes monitoring arrangements, will further mitigate these negative impacts.

51. The Project is classified as category C under ADB’s Involuntary Resettlement Policy (1995). Land acquired for it is mostly barren and undeveloped, requiring minimal arrangements for land acquisition and preparation. WTGs and transmission towers will be erected on uninhabited land and will not cause displacement, affect any physical structures, necessitate any resettlement, or cause any loss of livelihood. No indigenous or forest-dependent people live close to or within the project site. Hence, the Project is classified as category C under ADB’s Policy on Indigenous Peoples (1998), and an indigenous peoples’ plan is not required.

E. Development Impact

1. Impact, Outcome, and Output

52. The impact of the Project is reduced GHG emissions per unit of GDP in the PRC by at least 15% by 2015 from its 2005 level. The outcome of the Project is an increased share of renewable energy in total energy consumption in the PRC, from 7.5% in 2005 to 10% by 2010. The output of the Project is the 100.5 MW wind power generation facility, power transformers, a booster station, a control and monitoring system, and associated infrastructure and ancillary works completed on time and within budget.

2. Development Effectiveness

53. The development effectiveness of the Project has been assessed in terms of sustainable economic development, inclusive growth, business success, and private sector development, following the guidelines for implementing the Good-Practice Standards for Evaluation of Private Sector Investment Operations as prepared by the Evaluation Cooperation Group of the multilateral development banks.23

54. The Project promotes sustainable economic development by (i) providing a large and predictable amount of zero-emission electricity to mitigate power shortages in the northern PRC that have frequently constrained the development of regional manufacturing and service industries; (ii) replacing the usage of 2.0 Mt of standard coal for electricity production and reducing CO2 emissions by 5.6 Mt during its concession period, thereby improving the local environment and abating global warming and climate change; and (iii) enhancing the country’s energy security by substituting energy imports with indigenous renewable energy sources equivalent to up to 1.5 Mt of oil during its concession period.

55. The Project contributes to inclusive growth by (i) creating job opportunities for local communities during construction and operation and stimulating the expansion of local manufacturing and service industries, mostly related to assembling, transporting, installing, and repairing wind power equipment, constructing access roads and foundations, and developing ecotourism focused on wind energy capture and utilization; (ii) increasing the income of rural families through land-lease fees and the purchase of local products and services; (iii) improving physical infrastructure by upgrading transport, power transmission, and telecommunication facilities in the region; (iv) enlarging the revenues of the local government by paying various local taxes and surcharges, as well as fees for resource use; and (v) facilitating poverty alleviation targeted at the

23 Multilateral Development Banks Evaluation Cooperation Group. 2001. Good Practice Standards for Evaluation of Private Sector Investment Operations. Paris.

12 most needy in Zhangbei County, which is one of the least-developed and poorest counties in the country. The summary poverty reduction and social strategy is presented in Appendix 9.

56. The Project encourages and catalyzes more proactive participation by the private sector and foreign investors in renewable energy development by (i) establishing a business model that provides financial and technical assistance to enable a Sino-foreign joint venture to construct and operate a large wind power project, with the goal of quickly replicating this model in other relatively underdeveloped northwestern provinces; (ii) delivering demonstration effects for future private sector investments in the wind power sector on the optimal exploitation of wind resources, deployment of more efficient and reliable technologies, adoption of more prudent risk identification and mitigation practices, and introduction of international standards for environmental and social safeguards; and (iii) developing a nonsovereign financing modality to accelerate renewable energy projects. In addition, the Project helps to remove uncertainties for wind power project financing, gives potential investors and financiers a better understanding of the intrinsic risk factors in wind power development, and encourages large wind power projects that would deliver economy-of- scale benefits to reduce unit costs.

IV. THE PROPOSED ASSISTANCE

A. The Proposed Loan

57. The proposed ADB loan will consist of a direct loan funded by ADB from its ordinary capital resources and, to the extent that cofinancing is made available under ADB’s B loan program, a B loan funded by international banks. The loan funded by ADB from its ordinary capital resources will be for up to $34.3 million, with a tenor of 14.5 years from the date of the first disbursement, including a grace period of 18 months. The interest rate and finance charges for the loan will be approved by ADB’s pricing and credit enhancement committee. To the extent that cofinancing is made available under ADB’s B loan program, the loan will include a B loan for up to $56.2 million funded by international banks. Any B loan will have a tenor of up to 14.5 years from the date of the first disbursement and be subject to such other terms and conditions as may be mutually agreed to by the Borrower and the participating banks, with the concurrence of ADB.

58. Certain domestic financial institutions have expressed interest in providing local currency funding to the Borrower through a parallel loan. If domestic financial institutions participate in financing the Borrower, the amount available for participation under the B loan will be diminished to the extent of that participation.

59. The proposed loan will be documented in a loan agreement containing terms and conditions typically included in loans to private sector borrowers without governmental guarantees, as well as representations and covenants confirming or requiring compliance with ADB’s policies. The loan will be subject to conditions precedent to disbursement, including all contractual and financial arrangements satisfactory to ADB.

B. Justification

60. The Project is suitable for ADB support mainly for the following reasons: (i) It is consistent with the Government’s strategies for power sector reform and renewable energy development, supporting economic growth and energy diversification in an environmentally sustainable manner, and reducing the country’s dependence on fossil fuels. The Project is aligned with ADB’s country partnership strategy and energy sector road map, complementing ADB’s efforts to help the PRC achieve a low-carbon growth pattern.

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(ii) It stimulates financial innovation for renewable energy development. The CMI will be utilized to provide up-front financing against future credits from CERs. (iii) The Project promotes public–private partnerships in clean and renewable energy development. ADB plays a catalytic role to mobilize financing and risk-taking capacity from reputable international and domestic financial institutions and to cut transaction costs through appropriate loan syndication. (iv) The Project directly contributes to mitigating global warming and climate change by conserving resources and reducing GHG emissions, as compared with a business- as-usual approach for generating electricity by combusting fossil fuels. (v) The Project helps deliver ADB’s value addition. ADB’s assistance will generate significant demonstration effects for other wind farms, especially in the areas of deploying advanced technologies, improving risk identification and management, and introducing international standards for environmental and social safeguards. (vi) The Project contributes to poverty reduction and promotes sustainable development in the project area.

61. Large specialized SOEs in the PRC’s energy sector have relatively strong financial and institutional capacity to implement projects that adopt advanced technologies carrying certain inherent uncertainties. Once these advanced technologies have been successfully deployed, more public and private sector sponsors and financiers will have a better understanding on the intrinsic risks and be encouraged to develop and operate similar projects.

C. Main Risks and Mitigation Measures

62. The Project is technically reliable, financially viable, economically sustainable, environmentally friendly, and fully protected by the national Renewable Energy Law and Government support for tariff determination, power grid integration, and uploading 100% of output. The main risks of the transaction have been identified and their mitigation measures have been designed.

D. Investment Limitations

63. The proposed loan will be within ADB’s single, group, sector, and country exposure limits for nonsovereign investments. A list of ADB’s nonsovereign operations in the PRC is presented in Appendix 10.

E. Anticorruption Policy, and Combating Money Laundering and the Financing of Terrorism

64. The Borrower will be advised of ADB's policies on anticorruption24 and combating of money laundering and the financing of terrorism.25 Consistent with its commitment to good governance, accountability, and transparency, ADB will require the Borrower to institute, maintain, and comply with internal procedures and controls following international best practice standards for the purpose of preventing corruption or money laundering activities or the financing of terrorism and covenant with ADB to refrain from engaging in such activities. The financing documentation between ADB and the Borrower will further allow ADB to investigate any violation or potential violation of these undertakings.

24 ADB. 1998. Anticorruption. Manila. 25 ADB. 2003. Enhancing the Asian Development Bank's Role in Combating Money Laundering and the Financing of Terrorism. Manila.

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V. ASSURANCES

65. Consistent with the Agreement Establishing the ADB, the Government has confirmed that it has no objection to the proposed assistance to the Borrower. ADB will enter into suitable documentation, in form and substance satisfactory to ADB, following approval of the proposed financing by the Board of Directors.

VI. RECOMMENDATION

66. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Asian Development Bank and recommend that the Board approve:

(i) a loan of up to $34,300,000 to CECIC HKE Wind Power Co., Ltd., from ADB’s ordinary capital resources, with interest to be determined in accordance with procedures applicable to ADB’s nonsovereign operations and as approved by ADB’s Pricing and Credit Enhancement Committee, with a term of up to 14.5 years and such other terms and conditions as are substantially in accordance with those set forth in this report, and as may be reported to the Board; and

(ii) to the extent that cofinancing is made available under ADB’s B loan program, a B loan of up to $56,200,000 to CECIC HKE Wind Power Co., Ltd., to be funded by international banks on terms agreed among ADB; CECIC HKE Wind Power Co., Ltd.; and the B loan participating banks, and such other terms and conditions as are substantially in accordance with those set forth in this report and as may be reported to the Board.

Haruhiko Kuroda President

13 February 2009

Appendix 1 15

DESIGN AND MONITORING FRAMEWORK

Data Design Performance Sources/Reporting Assumptions Summary Targets/Indicators Mechanisms and Risks Impact Assumptions Reduced GHG emissions CO2 emissions per unit of Reports of the International The Government upholds its per unit of GDP in the GDP are reduced by at Energy Agency commitment to renewable PRC least 15% by the end of energy development, resource 2015 from their 2005 level China Statistical Yearbooks conservation, and published by the National environmental protection. Bureau of Statistics of China Political stability and economic China Energy Statistics sustainability are maintained. Yearbooks Outcome Assumptions Increased share of Renewable energy Periodic reports of the China The power grid gives priority to renewable energy in total accounts for 10% of total Electricity Council purchasing power from clean energy consumption in the energy consumption by and renewable sources. PRC 2010 (7.5% in 2005) Statistics from the China Wind Power Association The project has a sound governance structure to operate Reports from the State Grid and maintain the wind farm Corporate of China on the efficiently. volume of electricity generated and loaded to the grid

CDM verification of reports on reduction of CO2 emissions Output Assumptions 100.5 MW wind power Annual electricity supply Reports of independent Smooth, timely, and adequate generation facility, power of 250.9 GWh is project supervision agency connection with the power grid. transformers, a booster generated from wind station, a control and resources, starting from Reports of the CDM Satisfactory implementation of monitoring system, and 2010 validation agency measures to ensure associated infrastructure environmental and social safeguards. and ancillary works CO2 emissions are Reports of the project completed on time and reduced by 5.6 million company Risks within budget tons during the 25-year Delayed project completion due concession period (2010– to tight supply of wind turbines 2035) or inclement winter weather.

Cost overrun due to price hikes on raw materials and contractual services. Activities with Milestones Inputs 1. Site preparation and civil works started in early 2008. 2. Grid integration agreement obtained from the State Grid Corporation of China in Project sponsors May 2008. Equity contribution in cash 3. Regulatory and statutory approvals and permits obtained in July 2008: amounting to 34% of the total (i) formal approval by the National Development and Reform Commission, and project investment (ii) approval of the project environmental impact assessment by the Hebei Provincial Environmental Protection Bureau. Inputs 4. Mandate letter for long-term debt financing signed with ADB in September 2008. 5. Due diligence and debt facility structuring started in October 2008. ADB 6. On-site community consultations conducted in November 2008. Leadership in syndication of 7. Cofinancing agreements with other partners reached in March 2009. long-term debts for the Project 8. Physical project completion completed at the end of 2009.

16 Appendix 1

9. Emission reduction capacity validated in June 2010. Long-term debts from its ordinary capital resources

Assistance in preparing and marketing CER credits

Cofinancing partners Long-term debts, jointly up to 41% of the total project investment

Government Enforcement of the PRC Renewable Energy Law and its implementing policies: (i) full integration with the state power grid; (ii) priority in generation dispatch scheduling; (iii) full upload of wind power generated into the power grid; and (iv) supporting infrastructure, mainly road access to the wind farm

Authorization of the concessional development right for the wind power project: (i) tariff determination for the first 30,000 hours of operation at full capacity equivalent and (ii) payment settlement procedures with the power grid

ADB = Asian Development Bank, CDM = Clean Development Mechanism, CER = certified emission reduction, CO2 = carbon dioxide, GDP = gross domestic product, GHG = greenhouse gas, GWh = gigawatt-hour, MW = megawatt, PRC = People’s Republic of China.

Appendix 2 17

DEVELOPMENT EFFECTIVENESS FRAMEWORK

Objective Impact Performance Targets Measurement Sustainable Contribute to economic Economic internal rate of Economic internal rate of return of Economic growth by mitigating return greater than 12%, the Project Growth power shortages reflecting strong positive economic externalities Occurrence of power shortage in the areas covered by the North Supplying 250.9 GWh of China Power Grid reduced clean and renewable wind power per year for Records of electricity purchases by industrial and household the power grid company consumption Validation records for sales of CER credits Improve local and global Replacing 86,118 t of environment by reducing standard coal for power coal use and CO2 generation and reducing emissions CO2 emissions by 242,127 t per year Enhance energy security Decreasing the need for through lessening energy imports equivalent reliance on energy to 1.5 million t of oil imports Inclusive Create job opportunities Employing local workers Reports from the County Labor and Development for the local community during the construction Personnel Bureau (about 500 jobs) and operation (about 50 jobs) Land leasing contracts and records for staff and contracted of the project company service workers Reports of the county government Stimulating expansion of Reports of the county tax bureau local manufacturing and services industries (about Reports of the project company 1,000 jobs) Increase the income of Paying land leasing fees rural households and purchasing local products and services Improve infrastructure Expanding local road, power transmission, and telecommunication facilities Enlarge fiscal revenues Paying various taxes and surcharges, as well as fees on resource use Facilitate poverty Development of ecotourism alleviation Activities of corporate social responsibility Business Project Company Success Impact Expand the sponsors’ 100.5 MW of wind power Project completion report wind power facilities to generation capacity with benefit from economies of technically and Power grid integration report scale operationally viable Project operation and maintenance performance is constructed reports on schedule and within budget Sales settlement reports with the North China Grid Company Limited

18 Appendix 2

Objective Impact Performance Targets Measurement Loan amortization records

Maintain high-quality and A high availability factor of Contract on selling CERs sustainable operations 95% is achieved and maintained for the wind Annual reports of the project farm company on operational, financial, Achieve financial The project financial and environmental performance profitability internal rate of return is Reports of the China Wind Industry greater than the weighted Association average cost of capital

Maintain satisfactory debt Timely and full interest services payment and loan principal amortization are ensured Generate carbon credits CERs for about 0.5 million t from reduced CO2 of CO2 equivalent emissions generated before 2012 are sold Improve corporate The corporate governance governance structure structure of the project company is enhanced

Beyond-Company Impact Deploy more advanced Wind farm design is and reliable wind power optimized technologies More efficient and reliable wind turbines are installed Adopt more prudent risk International standards are identification and used to improve risk mitigation practices management and safeguards systems Utilize innovative A financing modality of financing mechanisms to syndicated nonsovereign support the development long-term loans with of renewable energy sponsors’ credit projects guarantees is pioneered

Private Sector Establish Sino-foreign Participation by the private Statistics and information disclosed Development joint venture to develop sector and foreign by central and provincial renewable energy investors in renewable government agencies projects in the PRC energy development is increased Deliver demonstration effects for future private sector investments in wind power Develop a nonsovereign financing modality to support renewable energy projects in the PRC

CER = certified emission reduction, CO2 = carbon dioxide, GWh = gigawatt-hour, MW = megawatt, PRC = People’s Republic of China, t = ton. Appendix 3 19 WIND POWER DEVELOPMENT IN THE PEOPLE’S REPUBLIC OF CHINA

A. Abundance in Wind Power Resources

1. The vast area and long coastline of the People’s Republic of China (PRC) are endowed with abundant wind resources. According to the Third Nationwide Survey of Wind Energy Resources organized by the China Meteorological Administration in 2004–2005, the PRC has a total exploitable wind energy reserve of 4,350 gigawatts (GW). About 1,000 GW onshore and 200 GW offshore can be commercially developed with currently existing technologies. The onshore wind resources, with wind power intensity of over 150 watts per square meter (W/m2), are located across 200,000 square kilometers (km2), at an average intensity of 5.0 megawatts (MW) per km2. The United Nations Environment Program concluded in 2006 that the PRC’s technically exploitable wind energy resource at 50 meters (m) above ground would reach 1,400 GW. The China Wind Resource Assessment Report by the National Climate Center of the China Meteorology Bureau, published in December 2006, demonstrated a much higher estimate, concluding that technically exploitable wind energy resources at a height of 10 m above ground could reach 2,548 GW, without taking into account the Qinghai-Tibetan Plateau.

2. About 75% of the PRC’s rich onshore wind resources are concentrated in the northwestern grasslands and the Gobi Desert, stretching from Inner Mongolia through Hebei, Ningxia, and Gansu to Xinjiang. Within this narrow strip about 200 kilometers (km) wide, wind power density normally ranges from 200 W/m2 to 300 W/m2 and can reach above 500 W/m2 in some regions with the most favorable conditions.

3. With low population density on large territories, these northwestern provinces are relatively underdeveloped, with lower per capita gross domestic product (GDP) than the eastern and coastal provinces but holding abundant natural resources for future development. Land suitable for wind power development in these provinces is mostly barren, requiring minimal arrangements for land acquisition and resettlement. Environmental harm such as avian casualties, noise, and visual intrusion are negligible. Extensive wind power development will help reduce wind speeds by extracting energy from air flows and thus help alleviate the sandstorms that frequently affect the northern PRC and thereby reverse desertification.

4. Zhangbei County, Hebei Province, where the proposed Project is located, is 242 km northwest of Beijing. It is strategically situated between the load centers of Beijing, Tianjin, and Tangshan and the southeastern brim of the Inner Mongolia Plateau, where wind energy resources are exceptionally abundant. The average wind speed in a typical year at a height of 65 m is 7.64 meter per second, and the average wind energy density is 378.6 W/m2. Zhangbei has an estimated 5.0 GW of wind resources that can be commercially developed with existing technologies, of which 1.5 GW will be developed by the end of 2010.

B. Steady Improvement of the Regulatory Framework

5. Recognizing the staggering challenge of ensuring that ongoing energy growth be both environmentally sustainable and economically desirable, the Government of the PRC (the Government) has made a strong commitment to improving energy efficiency on the demand side and developing renewable energy on the supply side, to enhance energy security and address global warming and climate change. The Government has articulated a clear vision as reflected in its target of quadrupling the per capita GDP while only doubling energy use in 2000– 2020, requiring that energy elasticity be maintained at 0.3 over the next 12 years. In its medium- and long-term renewable energy development program promulgated in August 2007, the Government set a goal to produce 15% of its primary energy from renewable sources by 2020, up from 7.5% in 2005. The share of renewable sources for electricity production will be raised to

20 Appendix 3 20% by 2020, including plans to develop 30 GW of wind power, 20 GW of biomass and biogas power, and 300 GW of hydropower capacity.

6. The legal and regulatory environment for renewable energy development in the PRC has steadily improved in recent years. The value-added tax for wind power projects was reduced in 2001 from 17% to 8.5%, which is very important for wind farm developers as no fuel costs are attached to wind power generation. The Government is considering the application of a compulsory quota on renewable energy generation for independent power producers. No licensing is required for importing wind power equipment. The Renewable Energy Law was formulated in February 2005 and put into effect in January 2006, stipulating financial incentives for renewable energy projects such as a national fund to foster renewable energy development, improved access to financing, and specific tax preferences. It reduces risks for project developers by mandating power grid interconnection and full power offtaking, as well as by providing guaranteed minimum prices or subsidies for certain types of renewable energy.

7. Wind power development is a priority area in the national Clean Development Mechanism (CDM), enabling wind farms with more than 50% domestic ownership to sell certified emission reduction certificates under the terms of the United Nations’ Kyoto Protocol on Climate Change. By September 2008, 39 wind power projects in the PRC had successfully registered with the CDM executive board.

C. Rapid Development of the PRC Wind Power Sector

8. The PRC has been developing its wind resources for over 2 decades but by 2000 installed only 345 MW of capacity, equivalent to a small coal-fired plant. Since the preparation and adoption of the Renewable Energy Law in 2005, the PRC has made rapid strides in harnessing wind resources, doubling its wind power generation capacity each year. In the medium- and long-term renewable energy development program, the national target for cumulative wind power capacity was originally set at 5 GW by 2010 and 30 GW by 2020. The goal for 2010 was achieved 3 years early, in 2007, and has therefore been lifted to 10 GW. Reality is evolving so quickly that this revised goal of 10 GW is likely to be exceeded in 2008 and could be raised to a level surpassing 20 GW.

9. According to the Global Wind Energy Council, 3,155 wind turbines with a total capacity of 3.45 GW were installed in the PRC in 2007. This addition raised the PRC’s cumulative wind power capacity to 6.1 MW in 158 wind farms across 21 provinces. Meanwhile, about 4.2 GW of wind power projects had been approved by the Government and were under construction in 2007. Currently, Inner Mongolia leads the country by having erected 1,543 wind turbines by 2007. It plans to install 8 GW by 2010, or 80% of the national goal, and 18 GW by 2015, or 60% of the national goal for 2020, with Huitengxile alone doubling its capacity to 1 GW by 2010. Gansu has put forward proposals to develop by 2020 along the Hexi Corridor 20 GW of wind power, or 66% of the national goal.

10. The newly installed turbines in the PRC are much smaller than those in Europe and the United States, averaging 1.1 MW in 2007. According to the China Wind Industry Association, in 2006, only 11% of operating wind turbines had rated capacities larger than 1.0 MW, and about 79% of turbines still had rated capacities of 600 kilowatts (kW), 750 kW, or 850 kW. Many of these small wind turbines occupy good sites with strong wind resources and may be targets for replacement with larger and more efficient turbines in the near future.

11. The PRC’s total installed wind power capacity ranked fifth in the world in 2007 and may move up one or two places by 2010. In fact, wind power is the fastest-growing renewable energy source in the world, expanding by about 30% per annum. Global Wind Energy Council Appendix 3 21 data indicates that more than 20 GW of wind turbines were installed worldwide in 2007, bringing global capacity to 94 GW, up by 27% from 2006. This nearly doubles the 2004 capacity of 48 GW and is more than five times the 2000 capacity of 18 GW. The top five countries in terms of installed capacity are Germany with 22 GW, United States with 17 GW, Spain with 15 GW, India with 8 GW, and the PRC with 6 GW, jointly accounting for 72.6% of the world total. In terms of economic value, the global wind market was worth $36 billion in 2007. In capacity addition, the United States took the lead in 2007, followed by the PRC and Spain.

12. Despite its rapid development in recent years, wind power has achieved an insignificant share in the PRC’s overall power mix, occupying only 0.6% of the country's overall power generation capacity of 713.6 GW and a meager 0.2% in its total electricity output of 3,263.2 terrawatt-hours in 2007, according to the PRC Electricity Regulatory Commission. While wind power capacity addition accounted for 30% of total incremental power generation capacity in the United States in 2007, and 40% in Europe, wind power accounted for less than 3% of newly commissioned capacity in the PRC in 2006 and 2007. Most new power generation facilities are going to burn coal of deteriorating quality and emit carbon dioxide for many decades to come.

13. The current ratio between electricity output and the generation capacity of wind power in the PRC indicates serious wind resource underutilization by existing wind farms. The average capacity factor of wind farms was less than 20%, or 1,787 hours (h) of operation at full-load equivalent, in 2007, or less than the global average of 25%–30% (2,200–2,600 h). This partly reflected delays in commissioning power generation facilities and implementing transmission networks and power grid congestion, but also lack of wind farm management experience and equipment reliability issues.

14. Rapid capacity expansion and the 70% localization requirement of the National Development and Reform Commission (NDRC) have stimulated the domestic wind equipment industry, which is expanding quickly to meet high demand for wind turbines. More than 40 domestic manufacturers, including joint ventures, now assemble wind turbines of various size. They are gradually enlarging their combined share of the PRC turbine market, rising to 45% in 2006 from less than 10% in 2000. Jinjiang Gold Wind, Inc., in Xinjiang has the biggest market share, accounting for 33% of newly installed capacity in the PRC and 75% of domestic turbine output. Foreign manufacturers shared the remaining 55% of the turbine market in 2006, among which Vestas of Denmark, Gamesa of Spain, and General Electric of the United States took the biggest shares, jointly accounting for about half of newly installed capacity and over 90% of foreign turbine imports.

15. The PRC is the global leader in small wind turbines with capacity below 50 kW, which are used mostly for off-grid applications in remote areas. According to the World Wind Energy Association, the PRC operates 300,000 small wind turbines, accounting for 80% of the world's total.

D. Competitive Bidding for Concession Rights to Develop Wind Power Projects

16. NDRC promotes large-scale wind power development through a wind power concession program aiming to accelerate the pace of development and lower wind power generating costs on one hand, and to increase the use of domestic wind power equipment on the other hand. NDRC allows authorities in provinces with abundant wind resources to invite international and domestic investors to participate in competitive tendering. The major elements of a wind power concession include the following:

22 Appendix 3 (i) 25-year concession duration. This is sufficient to cover the economic life of the wind farm. (ii) Minimum capacity. Each project should have a capacity larger than 100 MW to achieve economies of scale. Wind farms under 100 MW can be approved by provincial governments on a case by case basis. The unit capacity of wind turbines should be greater than 600 kW. (iii) Local components. Seventy percent of wind turbine components must be manufactured domestically. (iv) Supporting infrastructure. Local authorities are responsible for building main access roads to wind farms. (v) Grid connection. The power grid company is responsible for constructing transmission lines to connect the wind farm substations and must sign a grid connection agreement with the wind power generating companies. (vi) Concession assignment. Project investors are selected by national open public bidding. Invitations to bid are announced in national newspapers and important bidding websites, and the results are similarly made public. (vii) Full uploading. All electricity produced by wind farms must be purchased by the provincial power grid company, through a long-term power purchase agreement. (viii) Tariff determination. The wind power tariff is determined through competitive tendering. The winner's quoted tariff is authorized as the feed-in tariff of that wind farm project. After the turbines have finished their first 30,000 h of operation at full capacity equivalent, the feed-in tariff is adjusted to the grid average.

17. The concession contract and long-term power purchase agreement protect the interests of wind power investors and help minimize risks in recovering investment costs. The NDRC approved 15 large wind power projects with a total capacity of more than 2,600 MW under five rounds of concessions held annually between 2003 and 2007. Most were awarded to subsidiaries of the big five power generating companies. Once the tariff for wind power is established through a competitive bidding process, developers have the option to expand the capacity of wind farms in the vicinity, provided that the tariff and other key conditions of the concession remain the same.

E. Accelerating Wind Power Development in the PRC

18. Wind power development is expected to accelerate in the near future mainly because of the improved regulatory framework, including the Renewable Energy Law and its implementing policies; technological progress; rising coal and oil prices in the long run; more stringent control of environmental pollution; and the Government’s stronger commitment to achieving greener and low-carbon economic growth. With good results coming during the 11th Five-Year Development Plan period, the national goal for cumulative wind power capacity by 2020 can be raised to 120 GW, equivalent to the total capacity of seven Three Gorges hydropower facilities, or 120 coal-fired power plants of 1.0 GW each. This target would be considerably larger than the International Energy Agency projection of 56 GW by 2020 but still account for less than 5% of the total technically exploitable wind energy resources in the PRC of 2,548 GW and will not affect the stability and reliability of the power grid. To achieve this target, 10 GW of wind power needs to be installed annually for 10 years between 2011 and 2020. Appendix 4 23

THE SPONSORS OF THE ZHANGBEI WIND POWER PROJECT

1. The Zhangbei Wind Power Project (the Project) of 100.5 megawatts (MW) will be implemented by a special purpose vehicle organized as a Sino-foreign joint venture, which will be indirectly 70% owned by China Energy Conservation Investment Corporation (CECIC) and indirectly 30% owned by HKC (Holdings) Limited, Inc. (HKC). Both sponsors have extensive industry experience and strong financial capability for developing renewable energy projects in the People’s Republic of China (PRC). The proposed Project is the sixth wind power project undertaken by CECIC in Zhangbei, Hebei. It is also one of three wind power projects, with a combined capacity of 500 MW, codeveloped by CECIC and HKC. 1 CECIC and HKC also collaborated to build a waste-to-energy cogeneration project in Linyi, Shandong Province.

A. China Energy Conservation and Investment Corporation

2. Headquartered in Beijing, CECIC is a large corporation owned by the Government of the PRC (the Government) and administered directly by the State-Owned Assets Supervision and Administration Commission of the State Council. CECIC is the sole state-owned enterprise in the PRC at the national level specifically tasked with designing, financing, and operating projects for energy efficiency, renewable energy, and environmental protection. CECIC started in early 1980s, in response to the second international oil crisis, as the Energy Conservation Planning Bureau in the former State Planning Commission, the forerunner of the National Development and Reform Commission. It was empowered with the responsibility to allocate and manage state energy conservation investment funds. In 1988, the PRC State Council commercialized these functions and registered CECIC as a corporation with its own legal rights and financial responsibilities under the PRC Company Law.

1. Business Operations and Development Strategy

3. To support the Government’s increasingly strengthened commitment to efficiently utilize and conserve resources, including energy and water, and build an environmentally friendly society, CECIC has pioneered in introducing new technologies and developing demonstration projects for energy efficiency and pollution control.

4. During the past 20 years since its establishment, CECIC has completed more than 3,000 large and important energy conservation and renewable energy projects in 13 sectors in more than 300 municipalities.2 The total accumulative investment exceeded CNY55.0 billion, serving both fast-growing coastal provinces and resource-abundant western inland regions. Currently, CECIC treats and recycles more than 2 million tons (t) of industrial wastes and 260 million t of wastewater per year. These projects have delivered significant environmental benefits, including (i) annual energy savings amounting to 45.8 million t of standard coal; (ii) annual chemical oxygen demand reductions amounting to 75,000 t; and (iii) annual reductions of carbon dioxide (CO2) emissions of 105.0 million t. CECIC has the goal to additionally save by 2012 through its

1 The other two wind power projects are (i) the 2006 national concession project of 200 MW with a total investment of CNY1.6 billion through a 60:40 joint venture at Danjinghe, Zhangbei, and (ii) the 2007 national concession project of 200 MW at Changma, Gansu Province. 2 These include 450 cogeneration projects with a combined capacity of 10,000 MW, more than 100 urban natural gas supply and distribution projects with a combined capacity of 13.93 million cubic meters per day, district heating projects servicing more than 200 million square meters, coal cleansing and treatment capacity of 59.69 million t per year, and wastewater treatment capacity of 110 million cubic meters per year for paper making and food processing industries.

24 Appendix 4

new investment 4.3 million t of standard coal, reduce CO2 emissions by 11.1 million t, cut 400,000 t of chemical oxygen demand, and process 5.0 million t of industrial wastes per year.

5. CECIC wholly owns or holds the majority shares of 15 second-level subsidiary companies and more than 60 third-level subsidiary companies. To grow further, CECIC plans to raise more equity capital through an initial public offering in a domestic or international stock exchange in about 3 years. In its long-term corporate development strategy, CECIC concentrates 80% of its assets in four key areas: (i) wind power development; (ii) waste management; (iii) water supply, wastewater treatment, and sanitation; and (iv) energy efficiency improvement and resource conservation. In recent years, CECIC has improved its corporate governance structure and formulated an action plan to fulfill its corporate social responsibilities.

6. CECIC’s investment in wind power development is channeled through its wholly owned subsidiary specialized in wind energy investment, the CECIC Wind Power Investment Co. (CECIC-WPI), which was established in January 2006 and now has total assets valued at CNY4.5 billion. For specific projects in different locations, project companies are set up to work with various equity partners and debt financiers.

7. To break bottlenecks on wind turbine supply and absorb advanced wind power technologies, CECIC acquired in June 2006 half of the second largest domestic wind turbine manufacturer, Zhejiang Windey Wind Generating Engineering Co., Ltd., which has mature technologies for 800 kilowatt wind turbines and is now testing 1.5 MW turbines in cooperation with a leading European turbine design company.

2. Operational Performance on Wind Power Development

8. CECIC-WPI has accumulated the capacity and experience to become an industry leader in designing, building, and operating large-scale wind farms in the PRC. In three northern provinces with abundant wind resources—Xinjiang Uygur Autonomous Region and the provinces of Hebei and Gansu—CECIC-WPI now takes the lead in (i) operating 6 wind farms with a combined capacity of 244.5 MW, (ii) building 2 new wind farms with a combined capacity of 249.5 MW, and (iii) preparing three wind farms with a combined capacity of 502.5 MW.

Appendix 4 25

Table A4: Wind Power Development by CECIC

Types of Installed Wind Wind Capacity Turbines Turbines Commission Wind Power Project Location (MW) (kW) Manufacturer Date CDM Status Under Operation 244.5 Zhangbei Manjing I Hebei 45.0 1,500 GE Wind 2006 Registered (0233) Zhangbei Manjing II Hebei 49.5 1,500 EHN 2007 Registered (0845) Zhangbei Manjing III Hebei 49.5 750 Windey 2008 Registered (1855) Tuoli I Xinjiang 30.0 1,500 GE Wind 2006 Registered (0536) Tuoli II Xinjiang 30.0 1,500 DEC 2007 Registered (1244) Tuoli III Xinjiang 40.5 1,500 DEC 2008 Validation

Under Construction 249.5 Zhangbei Manjing IV Hebei 49.5 750 DEC 06/2009 Requesting Registration (2170) Zhangbei Danjinghe Hebei 200.0 750/1,500 Windey 12/2009

Under Preparation 502.5 Zhangbei Lunaobao Hebei 100.5 1,500 DEC 01/2010 Cangma Gansu 201.0 1,500 DEC 12/2010 Gansu III Gansu 201.0 1,500 DEC 01/2010

Total 996.5 CDM = clean development mechanism, DEC = Dongfang Electric Corporation, EHN = Energía Hidroeléctrica de Navarra, GE = General Electric, kW = kilowatt, MW = megawatt. Source: The China Energy Conservation Investment Corporation Wind Power Investment Co.

9. Aiming at 10% share in the PRC’s wind power market, CECIC-WPI has conducted wind resource measurement and reserved development rights for about 2,000 MW of potential capacity in Inner Mongolia, Hainan, and Fujian; and plans to develop 1,500 MW of wind power by 2012. The certified emission reductions from its five wind farms have been successfully registered with the Clean Development Mechanism (CDM) executive board.

B. The HKC (Holdings) Limited . 1. Business Operations and Development Strategy

10. Established in 1973 as Kumagai Gumi (Hong Kong), Ltd., HKC has grown over the past 35 years into one of Asia’s most specialized investors, developers, and contractors for civil engineering, infrastructure, energy, and building development. HKC has accumulated reputation and experience in designing and implementing large infrastructure projects. It has built or engineered some of the world’s most impressive construction projects, including the world’s 7th, 8th, and 11th tallest buildings. HKC’s completed infrastructure and real estate projects include the following: (i) In Hong Kong, China. Bank of China Tower, Castle Peak A and B Power Stations, Hong Kong Cultural Centre, Hong Kong New Airport Terminal Building, Lantau Fixed Crossing, Tuen Mun Road, and Kui-Yong International Port, etc. (ii) In the PRC. the National Grand Theater, Palace Hotel and Jing Guang New World Hotel in Beijing; Di Wang Building, Jing Guang Center and Shenzhen Convention and Exhibition Centre in Shenzhen; Citic Plaza in Guangzhou; Outer Ring Tunnel and Shanghai New Exhibition Center in Shanghai; Qingzhou Min River Bridge in Fuzhou; Golden Port Complex in Tianjin; and International Shopping Mall for Construction Materials in Nanxun, Zhejiang.

26 Appendix 4

11. HKC’s long-term development strategy focuses on investments for property, infrastructure, and alternative energy in the PRC and other regions in Asia. (i) Property investment and development. Capitalizing on its extensive PRC relationships and its construction expertise, HKC has made big investments in PRC real estate markets in Beijing, Shanghai,3 Guangzhou, Shenyang, Tianjin, and Nanxun. HKC focuses on investing in office and commercial developments, as well as in residential properties in second- and third-tier cities. (ii) Infrastructure. HKC invested in a toll road in Guilin, 4 Guangxi Zhuang Autonomous Region, and a water treatment facility in Hainan.5 (iii) Alternative energy. With a long-term vision for developing clean and renewable energy to cope with volatility in the international energy market and to mitigate global warming and climate change, HKC has pioneered the PRC’s alternative energy industry. HKC has expanded its involvement in the wind power and waste-to-energy business, planning to develop more wind power projects in Heilongjiang,6 Hebei, Gansu, and Inner Mongolia. 7 HKC has also invested in biofuels in Chongqing and in waste-to-energy in Shandong.8

2. Major Shareholders

12. HKC conducted its initial public offering in 1987 on the Stock Exchange of Hong Kong (Stock No. 0190). In recognition of its rapid growth and business influence, HKC has been selected as a constituent stock in the Hang Seng Composite Index, Hang Seng Mainland Composite Index, Hang Seng Composite Industry Index–Properties & Construction, Hang Seng Freefloat Composite Index, and Hang Seng Mainland Freefloat Index, effective from 15 October 2008.

13. In April 2004, Creator Holdings, Ltd., became HKC’s majority shareholder. As part of HKC’s restructuring, Cerberus Asia Capital Management, LLC, and the Penta Investment Advisers, Ltd., took major equity stakes in October 2007 and are now HKC’s second and third largest stakeholders, respectively. Based in New York, the Cerberus Group is a leading private investment firm with approximately $23.5 billion under its management. Penta Investment Advisers, Ltd., is an Asia-focused alternative investment manager. Founded in 1998, Penta has focused on managing its Pan-Asian equity investment funds, valued at more than $3 billion.

14. In March 2008, HKC acquired a 74.99% interest in JIC Technology Company, Ltd, which was also listed on the the Stock Exchange of Hong Kong (Stock No. 987). The latter's name was then changed to Hong Kong Energy (Holdings), Ltd. (HKE). All of HKC’s new investment in

3 HKC is currently developing a prime site on the North Bund in Shanghai into a 300-meter-tall grade-A office building, a 175-meter-tall five-star hotel, and a 125-meter-tall boutique hotel. 4 HKC has invested in and will operate for 29 years the Guilin toll road measuring 40.6 kilometers, which was completed in February 2008 and is regarded as one of the most scenic expressways in the PRC. 5 HKC completed satellite city infrastructure for the Yangpu Economic Development Zone in Hainan in 1998. HKC invested CNY117.8 million in the Yangpu water treatment plant and will operate it until 2024. The plant has an optimum capacity to treat 250,000 t of water per day and a maximum capacity of 300,000 t. 6 HKC invested in a wind farm in Mudanjiang, Heilongjiang, in 2005, which began operation in late 2007 with 70 Vestas turbines. HKC owns 88% of phase I and 82% of phase II and will operate the wind farm for 70 years. 7 HKC obtained the right to construct a 1,000 MW wind farm in Inner Mongolia on 980 square kilometers. 8 HKC and CECIC established a 40:60 joint venture worth CNY260 million to own and run a waste-to-energy plant in Linyi, Shandong. Commissioned in 2007, the plant has adopted circulating fluidized bed technologies to process 300,000 t of wastes, generate 200 gigawatt-hours of electricity, and supply 1.8 million gigajoules of heat annually. It harvests revenues from garbage processing; sales of electricity, steam, and ash; and CDM credits. Appendix 4 27 the alternative energy business, including its equity contribution to the proposed Project, will be channeled through HKE, which is now a majority-owned specialized subsidiary of HKC.

28 Appendix 5

BRIEF INTRODUCTION TO THE POWER OFFTAKER

A. The State Grid Corporation of China

1. Reform of the power sector of the People’s Republic of China (PRC) started in 2000 with a strategic focus on separating power transmission and distribution from power generation to improve market competition and operational efficiency. On 29 December 2002, the PRC State Council established the State Grid Corporation of China (SGCC) to inherit most power transmission and distribution assets and business of the former State Power Company, which owned all thermal power generation facilities and transmission networks in the country. Five power generation companies—Datang, Guodian, Huadian, Huaneng, and China Power Investment Corporation—were established to manage and develop the thermal power generation business.

2. As a backbone state-owned enterprise with clear mandates to ensure national energy safety and to support economic lifelines, SGCC's core business is to build and operate power grids and to provide sufficient, secure, and reliable electricity supply for socioeconomic development. With a registered capital of CNY200 billion, SGCC has a service area covering 26 provinces, or 88% of the national territory.1 SGCC is the owner and operator of the State Power Grid, which consists of five regional power grids (northeast, north, northwest, east, and central) and three independent provincial power grids (Shandong, Fujian, and Tibet).

3. SGCC is the world's largest public utility company, with 1.5 million workers (72% for operations; 22% for construction; 2% for design, research, and development; and 4% for other management and logistic support). At the end of 2007, SGCC served 128 million customers and a total population over 1 billion, with 467,700 kilometers (km) of transmission line at 110 kilovolts (kV) or above and 1,350.8 million kilovolt amperes of power transformation capacity at 110 kV or above. Its total assets were CNY1,366 billion, with a debt–asset ratio of 60.4%.

4. In 2007, SGCC’s electricity sales were 1,974.2 terawatt-hours (TWh), an increase by 34.8% from that in 2005. Its revenue was CNY1,016 billion from main businesses (42.5% more than in 2005), which ranked it 24th in the Fortune Global 500. Electricity supply reliability rates in both urban and rural areas exceeded 99.5%, and the line loss rate was 6.3%.

Table A5.1: Key Performance Indicators of the State Grid Corporation of China

Performance Growth (2005=100) Item Unit 2005 2006 2007 2005 2006 2007 Electricity Sales TWh 1,464.6 1,709.7 1,974.2 100.0 116.7 134.8 Transmission line at 110 kV or Thousand km 381.8 413.2 467.7 100.0 108.2 122.5 above Transformation capacity at 110 million kVA 983.4 1,137.8 1,350.8 100.0 115.7 137.4 kV or above

Revenues from main businesses CNY billion 712.7 854.5 1,015.7 100.0 119.9 142.5 Total assets CNY billion 1,169.7 1,212.8 1,365.9 100.0 103.7 116.8 Urban electricity supply reliability % 99.8 99.8 99.9 100.0 100.1 100.1 Rural electricity supply reliability % 99.4 99.5 99.5 100.0 100.1 100.2 Line loss % 6.6 6.4 6.3 100.0 97.1 95.4 km = kilometer, kV = kilovolt, kVA = kilovolt ampere, TWh = terawatt-hour. Source: The State Grid Corporation of China.

1 The China Southern Power Grid Co., Ltd., manages the transmission and distribution business in five southern provinces: Guangdong, Guangxi, Yunnan, Guizhou, and Hainan. Appendix 5 29

5. The total power generation capacity connected to the State Power Grid in 2006 was 435.9 gigawatts (GW), 82% of which was coal fired. According to SGCC, the PRC's electricity consumption is expected to reach 3,591 TWh in 2008, up 10.5% or 360 TWh from that of 2007.

Table A5.2: Power Generation Capacities under Regional Power Grids in 2006

Installed Capacity: GW % of the Total Coal- Coal- Power Grids Total Fired Hydro Other Total Fired Hydro Other Total for the State Power Grid 435.9 355.4 75.4 5.1 100.0 81.5 17.3 1.2 North China Power Grid 118.8 115.5 3.3 100.0 97.2 2.8 of which: Beijing–Tianjin–Tangshan Delta 32.9 31.7 1.2 100.0 96.3 3.7 Northeast China Power Grid 41.4 35.3 5.7 0.4 100.0 85.2 13.9 0.9 East China Power Grid 129.0 109.9 14.9 4.2 100.0 85.2 11.5 3.3 Central China Power Grid 91.1 62.8 28.2 100.0 69.0 31.0 Northwest China Power Grid 42.9 29.2 13.3 0.4 100.0 68.1 31.0 0.9 GW = gigawatt. Source: The State Grid Corporation of China.

B. The North China Grid Company Limited

6. Headquartered in Beijing, the North China Grid Company, Ltd., (NCGC) was founded on 8 November 2003 with sole ownership by SGCC, by combining the North China Power (Group) Corporation and the Shandong Power (Group) Corporation. Its registered capital stood at CNY60 billion. Now NCGC consists of five provincial branch companies (Beijing, Tianjin, Hebei, Shanxi, and Shandong) and more than 30 other subsidiaries.

7. As the second largest among the five regional power grids under SGCC, NCGC bears responsibility for safeguarding power supply to the PRC’s capital, Beijing, and providing reliable power and services for economic and social development in the northern PRC. Its power grid covers 1.63 million square kilometers and serves a population of 230 million. NCGC’s power grid has 48 transformation stations and 111 500-kV transmission lines totaling to 13,783 km. NCGC had total assets of CNY239 billion and net assets of CNY86 billion by the end of 2005.

8. By the end of 2007, the total installed power generation capacity connected to the North China Power Grid (NCPG) was 145 GW, of which about 30% was in the Beijing-Tianjin- Tangshan area. This compares with the total installed power generation capacity in France of 112.2 GW, Germany (118.9 GW), Italy (71.4 GW), Russian Federation (215.3 GW), Spain (61.0 GW), and United Kingdom (76.2 GW) in 2004.2

9. Coal dominates power generation in the northern PRC, creating severe greenhouse gas emissions. About 97% of the power generation capacity covered by NCPG is coal fired, as the region has scant hydropower resources. To diversify electricity supply toward renewable sources, abundant wind energy potential in Hebei and Inner Mongolia must be effectively exploited, as pioneered by wind power development in Zhangbei. Demand for electricity in the northern PRC will continue to grow rapidly. According to the 11th Five-Year Development Plan for the NCPG, both the load volume and electricity usage in the Beijing-Tianjin-Tangshan area are estimated to double in the 15-year period from 2006 to 2020.

2 Energy Information Administration. 2007. International Energy Annual 2005. http://www.eia.doe.gov/pub/international/iealf/table64.xls

30 Appendix 6

FINANCIAL EVALUATION OF THE PROJECT

1. The financial evaluation of the Zhangbei Wind Power Project (the Project) uses 2008 as the base year. The main assumptions for financial projections are built on the project sponsors' financial model, with adjustments to reflect findings from due diligence. The analysis was carried out over 25 years in line with the length of the concession period for the wind power project as awarded by the National Development and Reform Commission (NDRC).

2. Business Model. Wind farm management is straightforward. All equipment is highly automated and can be monitored and operated remotely. The modular structure of wind farms means that a few turbines can be kept idle for maintenance without significantly reducing electricity output. No raw materials need to be procured, inventory handled, logistics or transport arranged, products advertised or marketed, or emissions controlled. No post-sale services are required. The volume of electricity output and sales follow a seasonal pattern but cannot be precisely scheduled. One hundred percent electricity output is sold to only one client, the North China Power Grid (NCPG). Financial settlements with NCPG are normally completed within 45 days, since the premium on tariff for wind power is shared by all end-users across the entire power grid.

3. The Project's FIRR and DSCR were tested under various scenarios. Overall, the Project is considered to be bankable under different scenarios, sustaining adequate debt service coverage.

Appendix 7 31

ECONOMIC EVALUATION OF THE PROJECT

A. Background

1. The economic analysis of the Zhangbei Wind Power Project (the Project) was carried out in line with a standard cost–benefit analysis framework and in accordance with Asian Development Bank Guidelines for the Economic Analysis of Projects.1 All economic costs and benefits are expressed in constant November 2008 domestic prices. The analysis was carried out over 25 years, in line with the length of the concession period for the Project as authorized by the National Development and Reform Commission.

2. Demand for power in the People's Republic of China (PRC) has risen rapidly in tandem with economic growth. Total power generation capacity in the PRC exceeded 712 gigawatts in 2007, dwarfing the installed capacity of 100.5 megawatts of wind power for the proposed Project.

3. Economic Costs. Capital costs include physical contingencies but exclude taxes, price contingencies, and financial charges during construction. Direct operational costs are paid to workers, contractors, and service providers and are expected to increase in real terms by 2.5% annually. Project inputs are domestic and valued through shadow pricing using a standard conversion factor of 1.14. The Project is considered environmentally and socially benign and is unlikely to have external costs.

4. Economic Benefits in Meeting Power Demand. Strong demand growth in the PRC means that all the electricity generated by the Project will meet unmet demand, rather than substitute for power from any existing generation capacity. Therefore, the entire project output is considered incremental, amounting to 250.9 gigawatt-hours (GWh) of clean electricity annually. The economic value of the incremental electricity generation is taken to be the weighted average willingness-to-pay for power across the customer classes, which was estimated at CNY0.76 per kilowatt-hour (kWh).2

5. Economic Benefits in Reducing GHG Emissions. As the Project employs renewable energy technologies, its production of electricity without greenhouse gas (GHG) emissions will generate global benefits in terms of avoided climate change. The Project is expected to reduce GHG emissions by 242,127 tons (t) of carbon dioxide (CO2) equivalent per annum relative to a coal-fired plant baseline. The global environmental benefit of the Project is estimated using certified emission reductions (CERs) as a proxy. The value of CERs is assumed to be $15 per ton of CO2 before 2012 and $6 thereafter. However, the literature on climate change suggests that avoided global damage from reducing CO2 emissions, or the social value of carbon, is likely to be significantly larger than the carbon market value.3 The Project’s economic internal rate of return (EIRR) improves dramatically when the social value of carbon is included on the benefit side.

6. Economic Benefits in Pollution Control and Resource Conservation. The Project will reduce other emissions, such as sulfur dioxide, nitrogen oxide, and particulate matters,

1 ADB. 1997. Guidelines for the Economic Analysis of Projects. Manila. 2 ADB. 2006. Technical Assistance to the People’s Republic of China for the Renewable Energy for Poverty Reduction. Manila. (TA 4309-PRC, approved on 31 May 2006, for $600,000). The estimate in the paper is CNY0.68 per kWh. This figure was adjusted to the 2008 price using inflation rates of 4.77% in 2007 and 6.43% in 2008. 3 Social value of carbon is estimated as the present value of the total damages inflicted or reduced globally when an additional unit of CO2 is emitted into or taken out of the atmosphere.

32 Appendix 7 which are generated by thermal power production. The Project will conserve scarce resources, mainly coal and freshwater. However, in the absence of a market for emission reductions and resource conservation, these benefits are not quantifiable and are therefore not captured in the economic analysis. The EIRR of the Project would be even higher when these benefits were included.

B. Tax Contributions

7. Taxation. The Government has given fiscal incentives to develop renewable energy in underdeveloped areas such as Zhangbei, halving the value-added tax (VAT) to 8.5%. Corporate income tax is exempted for the first 3 years of operations and, thereafter, is levied at 25.0%. Two surcharges for education and urban construction are based on the VAT at 5% and 4%, respectively. After the 3-year tax holiday, the corporate income tax increases together with the gross profit. It accelerates at the points when interest payments on long-term debt are phased out and again when the fixed assets are completely depreciated. The VAT and the surcharges sum to slightly more than CNY10 million per year. Total taxes amount to CNY554.6 million over the project life, contributing substantial fiscal revenue to support local development and solidifying support for the Project from the central and local governments.

C. Least-Cost Analysis

8. Coal-fired thermal power plants currently dominate electricity generation in the northern PRC. About 97% of the power generation capacity in Hebei Province is coal-fired, as scant hydropower resources exist there. Hence, a coal-fired power plant is set as a baseline project for least-cost analysis. The investment cost for a traditional coal-fired power plant in the PRC is relatively low at $600/kilowatt, or less than half of that of the Project, which is $1,364/kilowatt. However, a coal-fired power plant needs to purchase and combust coal continuously and emits a significant amount of CO2.

9. The analysis considers a subcritical coal-fired power plant, which has a CO2 intensity level of 1,100 t of CO2 emissions per GWh of electricity generated. Taking account of the social damage from CO2 emissions, the average incremental cost of the coal power unit is estimated to be $0.60/KWh of electricity generated. On the other hand, the average incremental cost of the Project is only $0.49/KWh. A coal-fired power plant also emits local pollutants such as sulfur dioxide and particulates that have adverse impacts on health. The estimate of average incremental cost for the coal-fired power plant will be even higher when these social costs are included. The analysis shows that the Project has the least economic and social cost.

D. Economic Internal Rate of Return

10. The EIRR of the Project is conservatively estimated to be 17.4%, which is above the benchmark social discount rate of 12%. When the benefits from avoided GHG emissions is added the EIRR increases to 33.6%.

Appendix 7 33

Table A7.1: Estimates of Economic Costs and Benefits (CNY million)

Year Total Capital Operation and Total Electricity CDM Net Economic Cost Maintenance Economic Sales Benefit Economic Cost Cost Benefit Benefit 2008 (447.2) (447.2) 0.0 0.0 0.0 0.0 (447.2) 2009 (562.4) (559.9) (2.5) 0.0 0.0 0.0 (562.4) 2010 (4.8) (4.8) 210.4 190.7 19.8 205.6 2011 (6.2) (6.2) 210.4 190.7 19.8 204.3 2012 (21.2) (21.2) 210.4 190.7 19.8 189.2 2013 (21.6) (21.6) 210.4 190.7 19.8 188.9 2014 (21.9) (21.9) 210.4 190.7 19.8 188.5 2015 (22.3) (22.3) 210.4 190.7 19.8 188.1 2016 (22.7) (22.7) 210.4 190.7 19.8 187.7 2017 (23.1) (23.1) 210.4 190.7 19.8 187.3 2018 (23.6) (23.6) 210.4 190.7 19.8 186.9 2019 (24.0) (24.0) 210.4 190.7 19.8 186.4 2020 (24.5) (24.5) 210.4 190.7 19.8 186.0 2021 (24.9) (24.9) 210.4 190.7 19.8 185.5 2022 (25.4) (25.4) 210.4 190.7 19.8 185.0 2023 (25.9) (25.9) 210.4 190.7 19.8 184.6 2024 (26.4) (26.4) 210.4 190.7 19.8 184.0 2025 (26.9) (26.9) 210.4 190.7 19.8 183.5 2026 (27.5) (27.5) 210.4 190.7 19.8 183.0 2027 (28.0) (28.0) 210.4 190.7 19.8 182.4 2028 (28.6) (28.6) 210.4 190.7 19.8 181.8 2029 (29.2) (29.2) 210.4 190.7 19.8 181.2 2030 (29.8) (29.8) 210.4 190.7 19.8 180.6 2031 (30.6) (30.6) 210.4 190.7 19.8 179.9 2032 (77.9) (77.9) 210.4 190.7 19.8 132.5 EIRR = 17.4% ( ) = negative, CDM = clean development mechanism, EIRR = economic internal rate of return. Source: Asian Development Bank estimates.

E. Sensitivity Analysis 11. A sensitivity analysis of the project EIRR was undertaken using @Risk 4.5 software. Ten thousand simulations were carried out, allowing the values of key inputs and outputs of the Project to vary ±20% from the base case to reflect the scope of embedded uncertainties. The EIRR distribution is in Figure A7. The fifth percentile of EIRR is 14%, indicating that the Project is economically justifiable even in the worst case.

34 Appendix 7

Figure A7: Distribution of Economic Internal Rate of Return

0.14

0.12 Mean EIRR = 17.4%

0.10 EIRR=14% at 5th percentile EIRR=21% 0.08 at 95th percentile

0.06 Probability

0.04

0.02

0.00 10% 15% 19% 24% 28% EIRR

EIRR = economic internal rate of return. Source: Asian Development Bank estimates.

F. Scenario Analysis 12. Four scenarios have been constructed to investigate the reaction of the EIRR with respect to reduced power generation, cost overruns, hikes in operating costs, and a carbon price drop. Under all scenarios examined, the Project remains economically robust.

Table A7.2: Reactions of EIRR to Adverse Scenarios

Scenarios EIRR (%) Base Case 17.4 10% Decrease in Power Generation 15.1 10% Increase in Capital Expenditure 15.4 10% Increase in Direct Operation Cost 17.2 10% Decrease in Price of Carbon 17.2 EIRR = economic internal rate of return. Source: Asian Development Bank estimates. Appendix 8 35

SUMMARY INITIAL ENVIRONMENTAL EXAMINATION

A. Introduction

1. The China Energy Conservation Investment Corporation (CECIC) won through a national competitive bidding process organized by the National Development and Reform Commission (NDRC) the concession rights for 25 years to develop a wind power project of 100.5 megawatts (MW) on a build-operate-own basis at Lünaobao in Zhangbei County, Zhangjiakou Municipality, Hebei Province.

2. The Zhangbei Wind Power Project (the Project) will be implemented by a special purpose vehicle in the form of a Sino–foreign joint venture indirectly 70% owned by CECIC and indirectly 30% owned by the HKC (Holdings), Ltd., (HKC). The total project cost is estimated to be CNY932.0 million, 34% of which will be financed by equity from two sponsors and 66% by long-term debts provided through a proposed Asian Development Bank (ADB) loan. Special funds have been allocated for environmental protection and conservation of water and soil in the project area.

3. The Project will install 67 wind turbine generators (WTGs), each with a rated output of 1.5 MW, on ridges ascending from northwest to southeast, perpendicular to the prevailing wind direction from the north. The Project is the sixth wind power project developed by CECIC in Zhangbei and planned to be fully commissioned by early 2010. The Project’s capacity factor is projected to be 28.5%, providing 2,497 hours (h) of operation at full-capacity equivalent and supplying 250.9 gigawatt-hours of clean electricity from renewable wind resources per annum to mitigate chronic shortage on the North China Power Grid (NCPG).

4. Coal-fired thermal power plants currently dominate electricity generation in the northern People’s Republic of China (PRC), accelerating resource depletion, exacerbating environmental deterioration, and causing ever-rising costs of electricity for industrial, commercial, and residential uses. The Project's main objective is to utilize abundant local wind resources more effectively to replace 86,118 tons (t) of standard coal per year and to abate greenhouse gas (GHG) emissions by avoiding more than 5.5 million ton of carbon dioxide emissions during the 25-year concession. The Project’s estimated pollution reduction is summarized in Table A8.1.

Table A8.1: Resource Conservation and Pollution Emission Reduction (tons)

For the 25-Year Item Per Annum Concession Period Standard coal 86,118 1,980,719 SO2 1,984 45,637 NOx 1,126 25,902 CO2 242,127 5,568,910 Smoke 20,950 523,750 Ash 21,530 495,180 Freshwater 5,900 135,698 CO2 = carbon dioxide, NOx = oxides of nitrogen, SO2 = sulfur dioxide. Source: The Environmental Impact Assessment reports for Zhangbei Wind Power Project by the Hebei Provincial Academy of Environmental Sciences, November 2007.

5. The Project contributes to poverty reduction and promotes sustainable development in the project area because it (i) provides power to stimulate and support the expansion of local industry and service businesses; (ii) creates employment during construction and operation and

36 Appendix 8 provides opportunities for developing ecotourism; (iii) improves local physical infrastructure such as access roads and transmission networks; and (iv) protects the regional ecological environment by reducing such air pollutants as sulfur dioxide, smoke, and ash and conserving resources, such as 5,900 t of freshwater per year, as compared with a business-as-usual approach to generating electricity by burning fossil fuels.

6. The environmental impact assessment (EIA) for the Project was conducted by the Hebei Provincial Academy of Environmental Sciences. It was approved by the Hebei Provincial Environment Protection Bureau in November 2007. The Hebei Water Conservation Bureau approved the water and soil conservation plan for the Project, and the Ministry of Land and Resources approved the land use plan in January 2008.

7. This summary initial environmental examination is based on comprehensive environmental impact studies, including the EIA, for the Project and direct consultations with stakeholders. The examination was prepared for ADB in line with its environmental and social safeguards policies and information disclosure requirements for category B projects.

B. Description of the Project

8. The Project involves constructing and operating a 100.5 MW wind power generation facility. Technical parameters designed for the Project are presented in Table A8.2.

Table A8.2: Technical Parameters

Parameter Zhangbei Number of WTG 67 Unit Capacity of WTG 1.5 MW WTG Rotor Diameter 77 m Hub Height 61.5 m Number of Blades per WTG 3 Total Power Generation Capacity 100.5 MW

Cut-in Wind Velocity 3 m/s Rated Wind Velocity 12.5 m/s Cut-out Wind Velocity 20 m/s Safety Wind Velocity 53.3 m/s WTG Rotor Speed 9.7–19.0 r/m

Total Area Required 0.71 km2 For permanent uses 0.39 km2 For temporary uses 0.32 km2

Extreme Wind Velocity at 65 m 41.1 m/s Average Wind Velocity at 70 m 8.42 m/s Wind Energy Density at 70 m 492.3 w/m2 km2 = square kilometer, m = meter, m/s = meter per second, MW = megawatt, r/m = rounds/minute, w/m2 = watts per square meter, WTG = wind turbine generators. Source: The Environmental Impact Assessment reports for Zhangbei Wind Power Project by the Hebei Provincial Academy of Environmental Sciences, November 2007.

9. The WTG selected for the Project was designed by the Repower GmbH of Germany and is manufactured by the Dongfang Electric Corporation of the PRC. More than 1,600 units of this type of WTG have been installed worldwide. Under the equipment supply contract, the manufacturer provides a 24-month warranty, which guarantees a per unit WTG yield curve of no less than 95% of the guaranteed value and an average WTG availability of no less than 95% of Appendix 8 37 the applicable availability percentage for all units of the wind farm collectively. The power generated will be evacuated from the substation connected to the NCPG through a 220 kilovolt line. According to the renewable energy law, the NCPG is responsible for building transmission lines to connect the wind farm to the existing power grid and to purchase 100% of the electricity generated by the Project.

C. Description of the Environment

10. Project Location. Abutting on the southern rim of the Inner Mongolia Plateau, the project site is centered at 114o32’30” east longitude and 41o03’50” north latitude. The project site altitude ranges from 1,500 meters (m) to 1,600 m above the mean sea level. It is 17 kilometers (km) from Zhangbei County Town and 242 km northwest from Beijing, making it close to the Beijing-Tianjin-Tangshan load centers. The project site is 21 km from the national highway connecting Beijing to Hohhot, the capital of the Inner Mongolian Autonomous Region.

11. The project area has a semi-arid, intermediate temperate continental monsoon climate, featuring a long and cold winter, dry and windy spring, and short and hot summer. The project site and its environs are the driest and coldest area in Hebei. Its annual rainfall is 300 millimeters, and its annual average air temperature is 2.6 degrees Celsius.

12. Zhangbei has some of the richest wind resources in the northern PRC, as it is on the regular route for frequent southbound cold highs from Siberia and the Mongolian Plateau, which rapidly sweep toward the North China Plain with strong winds. Total commercially exploitable wind power resources in Zhangbei are estimated to be around 5,000 MW. NDRC selected Zhangbei as the PRC’s first 1,000 MW wind power development district. More than 10 companies are currently developing or operating wind farms in or near Zhangbei. CECIC has developed five winds farms nearby, including one at Danjinghe as a joint venture with HKC.

13. The project site is favorable for wind power development. The average annual wind velocity at 70 m above ground is 8.42 m per second (m/s) and the annual wind energy density at 70 m is 492.3 watts per square meter. The frequencies for the five wind directions (west- northwest, northwest, north-northwest, southeast, and south-southeast) sum to 71.5%, and the probability for the wind velocity ranging between 3 m/s and 25 m/s stands at 99.96%. The estimated maximum wind velocity averaged over a 10-minute interval occurring once every 50 years is 41.1 m/s.

14. Physical Environment. The project site is mostly uninhabited and degraded grassland, with many rock outcrops and gravel areas with scarce vegetation. The soil is arid, mainly sand and silt with little agricultural value. The project area has certain natural water sources, including both surface and groundwater, but does not enclose any identified archeological, historical, cultural, or religious sites or commercial deposits of mineral resources. The air and water quality is typically average for the region. The background noise comes mainly from wind.

15. Biological Environment. Because of the dry climate, the project site and its surrounding areas have no large trees apart from those planted in villages. There are no wildlife sanctuaries, reserve forests, bird sanctuaries, and rare or endangered species of animals or plants in the vicinity. There are no specific migration paths of birds near the project area.

16. Socioeconomic Environment. Human settlements are found only in areas below where the wind farm is located. With an area of 4,185 square kilometers (km²), Zhangbei had a

38 Appendix 8 population of 370,800 in 2007, 83% of which depend on agriculture and animal husbandry1 and are thus vulnerable to the harsh climate. In 2006, the county’s GDP stood at CNY2.5 billion, and the net income per farmer was merely CNY2,773 ($347), which is less than $1 per day and among of the lowest in the PRC.

D. Land Acquisition and Resettlement

17. Land Acquisition. The land to be affected by the Project will total 0.71 km2, of which 0.39 km2 (54%) will be permanently occupied and 0.32 km2 (46%) temporarily used. Most lands are on currently unproductive ridges and have been acquired through negotiations with the villagers as willing sellers.

18. Indigenous Peoples and Resettlement. No indigenous people live close to or within the sites identified for the wind farm. As the sites are vacant, there is no need for resettlement arrangements. Therefore, ADB’s Involuntary Resettlement Policy (1995) and Policy on Indigenous Peoples (1998) are not triggered.

E. Environmental Impacts and Mitigation Measures

19. Environmental protection standards in the PRC have been strengthened in recent years. The construction and operation of wind farms must strictly follow a series of national standards, including the following: (i) Ambient Air Quality Standards (GB3095-1996) Grade II; (ii) Surface Water Quality Standards (GB3838-2002) Grade III; (iii) Standard of Environmental Noise in the Urban Area (GB3096-1993) Grade I; (iv) Ecology Quality Standards; (v) Air Pollutant Discharge Standards (GB16297-1996) Grade II; (vi) Sewage Discharge Standards (GB8978-1996) Grade I; (vii) Construction Site Noise Limits (GB12523-1990) Grade III; and (viii) Industrial Sector Noise Standards (GB12348-1990) Grade II.

1. Impacts and Mitigation Measures during Construction

20. Project construction entails only minor civil, mechanical, and electrical works over a relatively short period on several small areas scattered over a wide area. Construction, particularly the construction of a 1.8 km road from the main road to the wind farm, will create some small and transient environmental disturbances such as noise, exhaust emissions, and flying dust from moving trucks and heavy equipment. No groundwater will be tapped for construction work. The effect on vegetation, animals, water and soil loss, and the atmosphere are scant. Earth excavated during road construction will be used for road embankments and minor leveling of the site during site restoration after construction. The wastes from about 150 workers, estimated to be 37.5 kilograms per day, will be collected and transported to the county garbage treatment site.

21. The 67 WTGs will be erected sequentially using only two to four cranes. Construction and installation equipment will be removed upon completion, and the ground will be cleaned so that the land can be reused. Vegetation cover spoiled during temporary land uses will be regenerated within 3 years. The nearest residence is at least 500 m away from the project site, and noise from the operation of heavy equipment will be below 50 decibels (dB).

1 The rural population is distributed in 18 towns, 366 administrative villages, and 1,167 natural villages. Appendix 8 39

22. Construction will generate direct and indirect temporary employment for both casual and skilled labor. Health and safety measures will be implemented, including AIDS prevention. The existing culture and health of the local populations will not be affected as the construction period will be very short.

2. Impacts and Mitigation Measures during Operation

23. The operation and maintenance 2 of wind farms does not involve any atmospheric emissions or effluent discharges. Fluids and other waste materials associated with typical maintenance will not be stored on site and will be disposed of off site in approved landfills.

24. The main environmental impacts of the Project during operation and the corresponding mitigation measures are as follows: (i) Land use. The land occupied by the wind farm is not arable, and the permanently occupied land is very small and properly purchased. (ii) Bird fatalities. The WTGs will not endanger migratory birds or bats as there are few in the wind farm area, which is not located in the main habitat or along the main migration routes of migratory birds. According to the project EIA, the death rate of birds and bats will not rise because of the Project. (iii) Noise. The operating noise of 1.5 MW WTGs ranges from 90 to 102 dB, and drops quickly to 45 dB at a distance of 500 m. As the nearest residences are at least 500 m away from the wind farm, they will not be affected by the noise. (iv) Air pollution. The WTGs do not generate any air pollution emissions. (v) Visual intrusion. WTG towers erected far from inhabited areas will not create adverse visual impacts, as the ridge on which the wind farm is located is not known for its natural beauty. The turbine design minimizes the flickering effects of blade rotation. Villagers plan to develop ecotourism using the wind farms to attract tourists interested in clean energy development. (vi) Air traffic safety. The Project will strictly adhere to regulations regarding air traffic safety relevant to tall WTG towers. In line with regulations for air navigational markings, the upper section of the towers and turbine blades will be marked with bands of a specified width to enhance their visibility. Blinking lights will provide clear identification at night. No impact on air traffic safety is anticipated. (vii) Soil erosion. Transformers at each WTG tower and the substation have been designed, and will be properly maintained, to avoid soil erosion. (viii) Magnetic radiation. Magnetic radiation from a wind farm is low, and the health of residents and local electrical equipment will not be affected. (ix) Waste management. The 24 cubic meters of wastewater and 12.5 kilograms of trash generated per day during operation are minimal. The wastewater will be treated on site for recycling, and the garbage will be collected and disposed of at the county’s garbage collection station, with little impact on the environment.

25. The project area has experienced seismic tremors ranging from 2.0 to 6.2 on the Richter scale. The WTGs, towers, and buildings have therefore been designed, and will be constructed, to be able to withstand lateral ground movements caused by seismic shocks. Insurance policies are required to cover possible losses from natural disasters.

2 Routine maintenance will be conducted throughout the lifetime of the wind turbines, generally amounting to 80 hours a year and mainly being the maintenance of the turbine, rotor, and electrical components; lubrication of parts; and full generator overhaul.

40 Appendix 8

F. Institutional Requirements and Environmental Management Plan

26. Organizational Structure, Roles, and Responsibilities. As the project company is responsible for constructing, operating, and maintaining the WTGs and the facilitating system, it will be accountable for environmental management and monitoring. The project company will ensure that it and all subcontractors comply with all regulations and conditions for various construction and operation activities. The Hebei Provincial Environment Protection Bureau will validate at the end of project construction that all environmental issues have been properly handled and will issue a formal certificate if the handling fully meets national requirements. Without such a certificate the wind farm cannot be commissioned. During the operation period, the Zhangbei County Environment Protection Bureau is required by the Hebei Provincial Environment Protection Bureau to conduct periodic examinations on the environmental issues related to the Project.

27. Environmental Management Plan. A social and environmental management plan (SEMP) has been formulated to articulate potential impacts, corresponding mitigating measures, and the implementation timeframe, with carefully designed monitoring arrangements. Carrying out the SEMP will minimize environmental and social disturbances associated with the construction, operation, and maintenance of the Project. The general manager of the project company, assisted by the heads of operations and administration departments, will bear the responsibility for satisfactory implementation of the SEMP. The SEMP and the environmental monitoring program are presented in Tables A8.3 and A8.4.

G. Public Consultation and Disclosure

28. CECIC has conducted many activities to raise awareness on wind energy development in the project vicinity. Local communities have demonstrated good understanding of the nature and scope of wind energy projects. Formal public consultation sessions were held during project due diligence in November 2008 and were attended by relevant stakeholders, including representatives of local residents and governments, to solicit their views on the Project and its environmental and social aspects. The outcome of these consultations has verified that the Project has no significant negative environmental and social impacts. In fact, the local communities welcome wind power projects with expectations for emerging economic opportunities and additional tax revenues to support social welfare programs that directly benefit local low-income groups. Furthermore, CECIC will exercise its social corporate responsibilities to provide assistance for community development.

H. Conclusions

29. Sufficient data and analyses exist to conclude that the Project, generating renewable energy from wind resources on marginal land with insignificant economic and ecological value, contributes to reducing GHG emissions and delivers long-term economic, environmental, and social benefits. Disturbances during construction will be small and transient and can be properly managed. The perceptible environmental impacts during operation are mostly noise and visual intrusion, but both are considered to be minimal given the WTGs’ distance to the nearest settlements and the limited landscape value of the project site. If the project company properly implements the SEMP, the Project is unlikely to cause any significant or lasting negative environmental or social impacts. Existing information is adequate to justify environmental and social clearance of the Project without requiring further environmental or social assessments.

Appendix 8 41

Table A8.3: Social and Environmental Management Plan

Environmental Issues Mitigation Measures Time Frame Land use Restricting construction-related activities within the project During site area. clearance and construction Minimizing temporary land uses through sequentially erecting wind turbines by sections. Carrying out daily site inspection to ensure removal of construction materials, debris, or surplus earth materials. Ecological Restricting vegetation removal within the wind farm area Before start of issues and for road alignment. construction Compensatory plantation using local plant species. During and after construction Natural habitat Restricting all activities, construction vehicle movement, During site and other events within the project area. clearance and construction Avoiding temporary disposal of excavated materials. Locating worker camps and stock yards properly, not to disturb natural habitats. Traffic control Vehicle used for delivery of materials to be well maintained During site and safety and approved by the authority. clearance and construction Temporary traffic control during transportation of wind turbines. Barricading the site with adequate marking flags, During site reflectors, etc. to the extent possible for safety of general clearance, traffic. construction, and operation Enforcing traffic control measures, including speed limits of delivery trucks and service vehicles of engineers and other staff personnel. Dust emissions Watering construction sites periodically to minimize During fugitive dust generation while laying foundation and during construction evacuation and construction works. Noise Construction equipment should be equipped with exhaust During silencers, and should be used only during daytime. construction Regular maintenance and service of equipment to adhere to applicable noise standards. Ensuring that workers wear earplugs and earmuffs to avoid noise impacts. Monitoring the noise levels at sensitive receptors as per Routinely during monitoring plan. operations Regular maintenance of wind energy converter.

42 Appendix 8

Environmental Issues Mitigation Measures Time Frame Storage of Storing construction materials containing fine particles in During construction an enclosure such that sediment-laden water does not construction materials drain into nearby water drains. Soil erosion Stabilizing slopes on road and any embankments (through During measures such as reapplying the top soil removed during construction construction to retain spores of grass and shrub species) to control sedimentation, erosion, and water pollution. Also consider the use of geotextiles to prevent soil erosion. Visual impact Minimizing new road construction. During construction Painting wind turbines, blades, towers, and structures with a neutral nonreflective color. Labor camps Ensuring that contract conditions are followed for During and maintaining hygienic conditions at the work site. construction, construction erection, and Ensuring availability of first-aid kits as required. facilities commissioning Training at least one person on the effective uses of first- aid facilities in case of any injury. Occupational Ensuring compliance of all safety and health rules and During health and uses of necessary safety equipment. construction safety Public health Taking proper care during loading and unloading to avoid During erection and safety mechanical injury. and during commissioning Providing necessary and sufficient illumination to avoid construction of wind turbines glare. Providing the necessary safety equipment such as safety nets, helmets, safety belts, etc. Preventing unauthorized personnel from accessing the towers and other hazardous or restricted areas. Providing temporary shade in the nearby area so that workers can rest at different intervals and avoid sunstroke. Providing sufficient and hygienic drinking water at work areas. Retaining the nearby available medical services’ contact number and address for emergency use. Covering sharp edges properly to avoid cut injury. Preparing the standard safety toolbox before starting the job. Appendix 8 43

Environmental Issues Mitigation Measures Time Frame Waste Ensuring proper and contained disposal of enamel and Routinely during management paint drums and other wastes. operations Providing adequate treatment facilities to treat sewage generated from toilets and canteen. Public health Providing minimum safety setback of 150 meter from any During and safety property line. operation during Designing site plan to comply with the requirement of operation aviation authorities to avoid electromagnetic interference. Complying with the national regulatory standards to ensure the safe operation of wind turbine rotors. Preventing unauthorized personnel from accessing towers and other hazardous or restricted areas. Developing an operational and emergency response program for fire and major accidents including emergency equipment. Checking road embankment for erosion and rutting, any sign of instability to be taken care. Identifying the personnel for monitoring and mitigating the effect of project on environmental and sociocultural resources. Providing all safety measures and sanitary facilities. Keeping tower entrance doors under lock and key. Electromagnetic Compliance with guidelines and other requirements to During interference avoid EMI with aviation equipment. operation Fiberglass blades are partially transparent to electromagnetic waves, and therefore do not generally cause EMI. Training and Training the employees and contractors and arranging Periodically awareness awareness programs for site workers and in nearby communities (including awareness on preventive measures for HIV/AIDS).

Environment, Periodically evaluating and assessing the EHS activities Periodically health, and and planning for improvements. safety (EHS) assessment EHS = environment, health, and safety, EMI = electromagnetic interference, HIV/AIDS = human immunodeficiency virus/acquire immune deficiency syndrome. Source: Environmental impact study reports for the Zhangbei Wind Power Project.

44 Appendix 8

Table A8.4: Environmental Monitoring Program for the Zhangbei Wind Power Project

Component Parameters Location Frequency Duration Responsibility Construction Period Land Use Actual usage in m2 The project site: Monthly The project to be strictly within Both permanent company, in the permitted usage and temporary coordination with land uses the Zhangbei Air Quality TSP, PM10, SO2, Project site Once every 24 hours a day Environmental and NOx (access roads, season: for 2 Protection foundation of summer, winter, consecutive Bureau, under tower structure, post monsoon working days the general and location of per week for 2 guidance of the new transformer weeks Hebei Provincial site) Bureau of Noise Level Project site Once every Continuous 24 Environmental (access roads, season: hours reading Protection foundation of summer, winter, with a frequency tower structure, post monsoon of 10 minutes and location of for 2 new transformer nonconsecutive site) days per week for 2 weeks Operation Period Air Quality TSP, PM10, SO2, Project site Once every 24 hours/day The project and NOx season: company, in summer, winter, coordination with post monsoon the Zhangbei for 1 year after Environmental operation starts Protection Noise Noise level Project site Once every Continuous 24- Bureau, under (access roads, season: hour reading the general foundation of summer, winter, with a frequency guidance of the tower structure, post monsoon of 10 minutes Hebei Provincial and location of for 1 year after for 2 Bureau of new transformer operation starts nonconsecutive Environmental site) days per week Protection for 2 weeks Ecology and Survival rate of site Project site with Annually For 3 years Visual Impacts forestation and other forestation and after operation plantation/vegetation vegetation starts maintenance focus 2 m = square meter, NOx = oxides of nitrogen, PM = particulate matter, SO2 = sulfur dioxide, TSP = total suspended particles. Source: Environmental impact study reports for the Zhangbei Wind Power Project. Appendix 9 45

SUMMARY POVERTY REDUCTION AND SOCIAL STRATEGY

Country/Project Title: People’s Republic of China: Zhangbei Wind Power Project East Asia Department, Energy Division Lending/Financing Department/ Direct Loan Private Sector Operations Department, Infrastructure Finance Modality: Division: Division 2 I. POVERTY ANALYSIS AND STRATEGY A. Linkages to the National Poverty Reduction Strategy and Country Partnership Strategy

Energy conservation and environmental protection are two major challenges for sustainable development in the People’s Republic of China (PRC). The proposed Zhangbei Wind Power Project (the Project) extends continued support of the Asian Development Bank (ADB) to implementing the PRC’s 11th Five-Year Development Plan (2006– 2010), which attaches top priority to improving energy efficiency, developing renewable energy, and controlling pollution emissions, and specifically requires that financial assistance from international financial institutions be used for resource conservation, environmental improvement, and infrastructure development. The Project supports the PRC’s Country Program on Climate Change toward cutting greenhouse gas emissions by replacing coal consumption and diversifying electricity supply into renewable sources.

ADB’s country partnership strategy for the PRC concentrates on achieving balanced and sustainable growth with the more efficient use of resources and more stringent environmental protection. The proposed Project is consistent with ADB’s overarching aims for inclusive, efficient, equitable, and sustainable economic growth to eliminate poverty. In its long-term strategic framework 2008–2020 (Strategy 2020), ADB identified energy as one of five core operational areas and achieving environmental sustainability as one of three strategic development priorities.a ADB’s operational focus for the energy sector is to address energy security and climate change by improving energy efficiency and enlarging the use of indigenous, clean, and renewable energy. In recent years, ADB has introduced new initiatives and adopted new and more client-oriented operational modalities (e.g., nonsovereign operations) to reinforce its assistance to its developing member countries as they acquire low-carbon technologies and implement projects promoting energy efficiency and renewable energy development. B. Poverty Analysis Targeting Classification: General Intervention 1. Key Issues The Project is located in Zhangbei, Hebei, one of the PRC’s nationally recognized poverty counties, with infertile soil and a harsh climate. Generating electricity by burning coal damages local air quality and the natural environment. The Project will improve local and regional air quality and reduce acid rain by replacing 86,118 tons (t) of standard coal for power generation and thus cut emissions by 1,984 t of sulfur dioxide, 1,126 t of nitrogen dioxide, and 242,127 t of carbon dioxide per year. It will also contribute to conserving the local natural environment by annually saving 5,900 t of freshwater and eliminating 21,530 t of coal ash residues, which cause soil deterioration.

Agriculture is the main economic activity of most of the population in the project county. Tax revenues from local industries are very limited. The county government needs to widen and strengthen sources of revenues to provide basic social services to residents.

2. Design Features The proposed Project will increase the electricity supply from clean and renewable sources to mitigate chronic power shortages and to booster the development of local manufacturing and service industries; encourage the participation of private sector and foreign investors in renewable energy development; create job opportunities and income growth during construction and operation; enlarge revenues to enhance welfare programs; upgrade physical infrastructure (e.g., roads, power transmission networks, and telecommunication facilities); and improve the regional ecological environment. The Project will generate demonstration effects for wind power projects in the PRC by deploying advanced wind power technologies and adopting international practices on corporate governance and risk management. The low-income group in the project area will directly benefit from the social, economic, and environmental impacts of the proposed Project.

II. SOCIAL ANALYSIS AND STRATEGY A. Findings of Social Analysis The project county, Zhangbei, is situated in the northern part of Hebei Province, bordering the Inner Mongolia Autonomous Region to the north, with a land area of 4,185 square kilometers and a population of 375,000 in 2007. The gross domestic product of Zhangbei was CNY1.7 billion in 2005, of which primary industries (including wheat, beans, potato, and livestock) contributed CNY900 million, or 53%; secondary industries (including leather and meat products and construction materials) contributed CNY350 million, or 21%; and tertiary industries (mainly tourism)

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contributed CNY450 million, or 26%. The annual revenue in 2005 was CNY446 million, of which only CNY40 million was generated by local businesses. It is estimated that the project will generate CNY13.3 million in revenues during a normal operation year through value-added taxes, corporate income taxes, and other surcharges.

B. Consultation and Participation 1. Provide a summary of the consultation and participation process during the project preparation. Stakeholders have been consulted to identify the environmental and social costs and benefits of the project. Mitigation action plans have been adopted through a participatory process to minimize environmental damage during construction and operation. The project company has adopted a corporate social responsibility mechanism to assist socioeconomic development and environmental enhancement in the project area.

2. What level of consultation and participation (C&P) is envisaged during the project implementation and monitoring? Information sharing Consultation Collaborative decision making Empowerment

3. Was a C&P plan prepared? Yes No The project company will continuously consult with stakeholders during construction and operation. C. Gender and Development 1. Key Issues. There is no gender issue related to the Project. 2. Key Actions. Gender plan Other actions/measures No action/measure III. SOCIAL SAFEGUARD ISSUES AND OTHER SOCIAL RISKS Issue Significant/Limited/ Strategy to Address Plan or Other Measures No Impact Issue Included in Design Involuntary Resettlement No Impact Full Plan Short Plan Resettlement Framework No Action Indigenous Peoples No Impact Plan Other Action Indigenous Peoples Framework No Action Labor Employment Plan Employment opportunities opportunities will be Other Action Labor retrenchment created during No Action Core labor standards construction and operation. National labor laws will be complied with. Affordability No Impact Action No Action Other Risks and/or An HIV/AIDS Plan Vulnerabilities awareness and Other Action HIV/AIDS prevention program No Action Human trafficking will be carried out. Others(conflict, political instability, etc), please specify No other Impact IV. MONITORING AND EVALUATION

Are social indicators included in the design and monitoring framework to facilitate monitoring of social development activities and/or social impacts during project implementation? Yes No

ADB = Asian Development Bank, HIV/AIDS = human immunodeficiency virus/acquire immune deficiency syndrome, PRC = People’s Republic of China, t = ton. a ADB. 2008. Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank 2008–2020. Manila. Source: Asian Development Bank.

ADB'S NONSOVEREIGN OPERATIONS IN THE PEOPLE’S REPUBLIC OF CHINA Status of Approved Private Sector Projects as of 31 December 2008 ($ million)

ADB Line of Invest- CFS PRG/ Combined Date of Investment No. Company Loan Equity ment Loan PCG Total Approval A. Under Administration 1. 7070 Xiamen International Bank 0.000 10.300 0.000 10.300 25 Jul 91 2. 7152/1669/1670 Chengdu Generale Des-Eaux-Marubeni Waterworks 26.500 0.000 21.500 48.000 11 Feb 99 3. 7159 Liberty New World China Enterprises 0.000 25.000 0.000 25.000 6 Oct 00 4. 7179 China Environment Fund 2002, LP 0.000 3.000 0.000 3.000 29 Oct 02 5. 7220 China Environment Fund 2004, LP 0.000 7.000 0.000 7.000 29 Oct 02 6. 7196 Yangtze Special Situations Fund, LP (formerly Colony China Opportunity Fund) 0.000 45.000 0.000 45.000 19 Mar 04 7. 7200 Shenzhen Orienwise Guarantee and Investment Co., Ltd. 0.000 10.000 0.000 10.000 31 Aug 04 8. 7204 Actis China Fund 2 LP 0.000 45.000 0.000 45.000 26 Nov 04 9. 7219 Bank of China 0.000 75.000 0.000 75.000 4 Oct 05 10. 7240 Hangzhou City Commercial Bank 0.000 30.000 0.000 30.000 27 Jul 06

11. 7244/2255 Municipal Natural Gas Infrastructure Development Project 50.000 25.000 75.000 150.000 30 Aug 06 pp 12. 7200-02 Credit Orienwise Group Limited 0.000 3.000 0.000 3.000 9 Feb 07 13. 7270/2389 Central and Western Airports Development Project 160.000 50.000 200.000 410.000 11 Dec 07 14. 7271 Energy Efficiency Multi-Project Financing Program 107.000 100.000 14 Dec 07 15. 7279/2422 Dalki Asia Pte. Ltd. (Dalkia Asia) and Local Partners 200.000 200.000 400.000 2 Jun 08 16. 7272 Asia Training and Research Initiative on Urban 4.000 0.000 0.000 4.000 18 Dec 07 Management Project Development Facility 17. 7285/2435 Datang Sino-Japan (Chifeng) Renewable Power 24.082 0.000 0.000 24.082 4 Sep 08 Corporation

B. Divested, Written Down, or Fully Repaid 1. 7072 China Assets (Holdings), Ltd. 0.000 4.000 0.000 4.000 19 Sep 91 2. 7087/1177 Guangzhou Pearl River Power Co., Ltd. 50.000 0.000 0.000 50.000 22 Sep 92 3. 7127/1477 Everbright Bank of China 0.000 20.000 0.000 20.000 5 Nov 96 4. 7144/1610 Fujian Pacific Electric Co., Ltd. 40.000 10.000 150.000 200.000 26 Feb 98 5. 7216/2177 Business Development Bank 20.700 0.000 0.000 20.700 11 Aug 05

C. Canceled 47 Appendix 10 1. 7031 Shanghai SITCO Enterprises Co., Ltd. 0.000 3.000 0.000 0.000 3.000 13 Dec 88 2. 7175/1905 China Water Utilities Group (formerly Water Infrastructure 35.000 0.000 0.000 35.000 2 Jul 02 Development) 3. 7225 Thunip Water Investment Co., Ltd 0.000 20.000 0.000 20.000 20 Dec 05 Total 610.282 3.000 382.300 646.500 107.000 1,742.082 ADB = Asian Development Bank, CFS = complimentary financing scheme, PCG = partial credit guarantee, PRG = political risk guarantee, SITCO = Shanghai Investment and Trust Corporation. Source: Asian Development Bank.